Under the plans, to be submitted to the monthly Ecofin meeting, Germany will end the year with a 2.9 per cent public deficit and France with a 3 per cent deficit, and shrink them further in later years. In 1996, Germany's deficit was 3.8 per cent of GDP, and France's 4.1 per cent.
Investors say that even if Germany and France miss their deficit targets by a little, European economic and monetary union will go ahead as planned.
"There's a political will to reduce public deficits on both sides of the Rhine and make EMU happen," said Patrick Guerillot, a fund manager at Jean-Pierre Pinatton.
But there is pessimism about Germany's chances, particularly among Germany's economic research institutes, investors and even within the Bundesbank.
If they're right, the German government must choose between easing the economic criteria and risking a weaker euro, or delaying EMU and putting the whole project at risk.
Even with economic growth of between 2 per cent and 2.5 per cent this year, Germany's institutes predict the deficit will top the 3 per cent limit. Forecasts range from 3.1 per cent to a high of 3.4 per cent.
Meeting the criteria to the letter is important psychologically to the German people, so the German media brim with stories about the prospect of delaying the euro or weakening the criteria. The government, though, is not ready to concede defeat.
The Commission also sees difficulties beyond 1997 for France. It says the country will struggle to bring its deficit to 1.4 per cent of GDP in 2001, as planned. The forecast assumes the economy will grow by 2.5 per cent a year between 1998 and 2001, double France's rate in the first half of the 1990s.
The Commission also says France's plans to cut taxes may hinder the reduction in deficits. Copyright: IOS & Bloomberg