The timetable now heading for delay

ECONOMIC VIEW; Who wants a balance sheet with liabilities in marks and assets in ecus?

Timetables have always figured large in the European project. One of the reasons for the success of the single market programme was that it came with a deadline: 1992. So it is with the plan for monetary union: EMU will start automatically on 1 January 1999 for qualifying countries, states the Maastricht Treaty.

But as Railtrack has shown this week, wrong timetables have to be amended - if necessary more than once. The schedule for EMU to start as early as 1997 was shelved earlier this year. Now, postponement of the 1999 deadline is looking ever more likely.

The point about deadlines is that they concentrate minds well ahead of the event. So it is with 1999. The European currency turmoil that erupted last week may seem to have come out of the blue. In reality, it was caused by the dawning appreciation in Germany of what is really at stake in EMU.

The flight of German capital to Switzerland and the shunning of bonds with a maturity beyond four years were manifestations of a growing groundswell of public concern about the abolition of the mark. This put politicians on the spot, forcing them to harden their conditions for EMU. Hence the moment of candour on the part of the German finance minister, Theo Waigel, about Italian ineligibility for monetary union in 1999.

Mr Waigel might just as well have lobbed a grenade into the markets: the effect was to explode the view that European leaders would fudge a deal allowing inflation-prone and fiscally stretched countries into a single currency.

But the very need to make any assessment at this stage of Italy's chances of joining EMU in three-and-a-half years' time arose in turn because of the timetable imposed by the 1999 deadline. One of the key conditions for eligibility for EMU is that a candidate country must have participated within "normal" bands of the Exchange Rate Mechanism for at least two years. This is why Euro-enthusiast Italy has been so anxious to rejoin the ERM within the next six months or so, since the latest date when the European Council will select the countries that qualify for EMU is probably July 1998.

Equally pressing now are the implications of the Maastricht convergence criteria about public finances, particularly the budget deficit. Under the Treaty, a key condition for eligibility is a general government budget deficit of no more than 3 per cent of GDP. If a decision is to be taken on this in 1998, the key year that will come under the microscope will be 1997.

Attempts to meet this objective are affecting all European states - including the UK - but none more so than France whose deficit is projected at 5 per cent this year. It was for this reason that last week's 1996 budget was so important - and came as so much of a letdown to the markets. Before the event, the Organisation for Economic Co-operation and Development said that the deficit cut envisaged for 1996 looked "meagre on an international comparison". The budget did little to change that judgement. Under a strict interpretation of the Maastricht criteria, a failure by France to meet the public deficit objective in 1997 would almost certainly lead to general postponement. Most people believe that monetary union must include at least one major country in addition to Germany. Otherwise it would simply institutionalise the de facto mark bloc of smaller satellites round Germany.

Of all the Maastricht convergence criteria, the one where most fudge had been expected was the stipulation that the gross public debt ratio should be 60 per cent of GDP or less - unless the ratio is declining and close to this level. The weasel words had been expected to allow Belgium in - despite a ratio of 134 per cent in 1995.

This may no longer be the case if the Germans insist on the Maastricht Treaty to the letter of the law. The result, however, would be to exclude the most federalist of all member states and the de facto capital of Europe. So much for a project seen as putting the roof on the European house.

Let's get serious. That's the message from the Germans as they look at the timetable imposed by the 1999 deadline. But the Germans are not alone in waking up to the full risks of EMU. The banks have suddenly realised that they are firmly in the firing line.

Finance ministers agreed earlier this year that new European notes and coins could not be ready before 2002. The question then arose: if currencies were fixed and the new European Central Bank came into operation in January 1999, how could the move to a single currency be effected?

Last May, the European Commission gave its answer with a Green Paper outlining a possible scenario for managing the transition. The central idea was to involve the banks more deeply in the intermediate stage by getting them to trade between themselves in the new currency. The Commission was worried that without this deepening of the move to EMU, it could lead to political backtracking and testing of commitment by the markets by movement of funds into hard national currencies.

The burden of the proposal was to ask banks to shoulder the risk of EMU coming unstuck after 1999. Who wants to run a balance sheet in which your liabilities are in marks and your assets in ecus - or whatever the Euro-currency is eventually called - if you suspect the "irrevocable" fixing of currencies may be all too revocable?

This is quite apart from the extensive costs involved for banks in the switch to a single currency and the running for three or more years of a dual currency book. According to APACS, the payment clearing association, the minimum cost of switching payments systems in the UK will be pounds 1bn.

As the timetable imposed by the 1999 deadline forces the first real assessment of EMU's true risks and costs , so the need for overwhelming political will to overcome these objections becomes paramount. For the moment, that degree of commitment, in both France and Germany, seems conspicuous by its absence. The obvious solution is the most likely one: the deadline will be postponed.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

Isis hostage crisis

The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

The runaway buccaneers and the ship full of gold

Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

Maverick artist Grayson Perry backs our campaign
Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

Assisted Dying Bill: 'I want control of my life'

This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
Move over, kale - cabbage is the new rising star

Cabbage is king again

Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
11 best winter skin treats

Give your moisturiser a helping hand: 11 best winter skin treats

Get an extra boost of nourishment from one of these hard-working products
Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

Paul Scholes column

The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
Frank Warren column: No cigar, but pots of money: here come the Cubans

Frank Warren's Ringside

No cigar, but pots of money: here come the Cubans
Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

Isis stands strong as its numerous enemies fail to find a common plan to defeat it

The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

Virtual reality: Seeing is believing

Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
Homeless Veterans appeal: MP says Coalition ‘not doing enough’

Homeless Veterans appeal

MP says Coalition ‘not doing enough’ to help
Larry David, Steve Coogan and other comedians share stories of depression in new documentary

Comedians share stories of depression

The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
Has The Archers lost the plot with it's spicy storylines?

Has The Archers lost the plot?

A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
English Heritage adds 14 post-war office buildings to its protected lists

14 office buildings added to protected lists

Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

Scientists unearthed the cranial fragments from Manot Cave in West Galilee