The timetable now heading for delay
ECONOMIC VIEW; Who wants a balance sheet with liabilities in marks and assets in ecus?
Thursday 28 September 1995
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.
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