UK faces rap from Brussels for borrowing too heavily: Disciplinary moves mark new push toward single currency

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EUROPE'S finance ministers began preparing the ground for the introduction of a single currency as early as possible with the announcement yesterday that they would discipline 10 member states, including Britain, whose governments have over-borrowed.

Low public debt, with the other convergence criteria of low inflation and stable interest rates, is a precondition of monetary union.

Yesterday's decision risks widening the gap between countries already close to meeting these targets and the rest, as financial markets are likely to continue to punish the worst offenders - countries such as Spain and Portugal - further weakening their currencies and their chances of meeting the convergence criteria.

Ireland, in recognition of the success of its government's radical debt reduction programme, will, with unindebted Luxembourg, be spared public humiliation.

However, ministers moved swiftly to quell any suggestion that the exemptions implied a weakening of the convergence criteria. Theo Waigel, the German finance minister whose opposition to the Irish exemption was overruled, said: 'There is no question of lax application of the criteria.' Hans Tietmeyer, president of Bundesbank, added: 'We must remind the citizens of Europe that confidence in monetary union will depend on strict application of the rules.'

Reports, prepared by the European Commission and to be made public next month, will set debt reduction targets, leaving the markets to discipline those that do not meet them.

Kenneth Clarke, the Chancellor of the Exchequer, said he expected the recommendations for Britain to be in line with the Goverment's debt-reduction target anyway. 'We know the fiscal deficit is high and that is why we have tightened policy, we do not expect to be asked to do anything we are not doing already,' he said.

Meanwhile, a report given by the European Monetary Institute to the finance ministers at the weekend suggests Britain and Denmark may already be paying a price for their intention not to participate initially in monetary union.

The EMI, asked to explore the interest-rate differential between Europe and the US, found during research conducted between January and the end of last month that the Netherlands, Luxembourg, France and Germany - the countries most likely to meet the convergence criteria first - sustained long-term rates below 2 per cent, on a par with Japan and the US.

Britain, Denmark and Ireland had rates of between 2 and 3 per cent, while rates in Portugal, Spain and Italy rates were still higher.

Mr Clarke denied there was any direct link, and attributed the pound's volatility to historic factors.