Fears mount over EMU timetable

Prospects of a delay heighten after German failure to meet Maastricht criteria.
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CONCERN about a postponement of European Monetary Union is growing after the German government revealed last week that it expected to miss the Maastricht budget deficit criterion for the second year running.

The latest setback to EMU comes as European leaders strive to combat fears that the timetable for monetary union is about to be abandoned.

The EMU worries combined with unexpectedly strong monetary growth in Germany last December to halt the dollar's recent advance against the mark. The upturn in M3 growth, which the Bundesbank seeks to guide within a target range, cast a shadow over hopes that the German central bank would cut interest rates soon.

German ministers and other European leaders including Jean-Claude Trichet, governor of the French central bank, did their best to combat doubts about the feasibility of achieving monetary union in 1999.

Responding to suggestions by former French president Giscard d'Estaing that the conditions for entry to EMU should be relaxed, Theo Waigel, the German finance minister, stuck to his hard line on a strict interpretation of the Maastricht Treaty.

However, a big monthly fall of 1.2 per cent in manufacturing output and a sharp downturn in French imports in November raised new worries about the ability of a weakening French economy to meet the Maastricht criteria. While the trade balance showed a record surplus, the 5 per cent fall in imports was seen as an indication of the severity of the economic slowdown at the end of last year.

A forecast for the German economy from the Economics Ministry cast a further pall over EMU prospects. The report said that unemployment would rise by a further 250,000 to average 10 per cent of the workforce in 1996, up from 9.4 per cent in 1995.

With the economy growing by only 1.5 per cent, the budget deficit would remain at 3.5 per cent of GDP, in excess of the 3 per cent upper limit set by the Maastricht Treaty as a condition for entry into EMU.

Despite this gloomy outlook, hopes for an early cut in interest rates took a knock when the Bundesbank said that M3 had risen in December at an annualised rate of 2.5 per cent over the fourth quarter of 1994, up from 1.9 per cent in November.

The increase, more than the markets had expected, led to fears that monetary growth in 1996 could conform with the objective of 4 to 7 per cent without further cuts in the discount rate, currently at 3 per cent.

Some cause for comfort came from a further fall in inflation. Preliminary estimates show that consumer prices rose by only 0.1 per cent in January, bringing the annual rate of inflation down from 1.5 to 1.4 per cent.