Creation Of The Euro: Political will triumphs over arithmetic

Analysis

THE figures unwrapped by aspiring members of the European Union's single currency may seem only dry-as-dust economic book-keeping. In fact, and just like the euro itself, they could not be more political.

For almost a year now, the question surrounding the euro has been not "if" but "when", and its main requirement that enough counties meet the qualifying Maastricht criteria to make the venture worthwhile.

That 11 countries are now willing and able to embark on the most ambitious venture since the 1957 Treaty of Rome is not a surprise. What is remarkable is that, given the political capital at stake, the book-keeping has been relatively honest.

There has, of course, been some sleight of hand. It remains mysterious quite how Italy, which for years regularly ran double-digit budget deficits, conveniently slashed last year's to a mere 2.7 per cent of Gross Domestic Product, well inside the 3 per cent Maastricht guideline. There is also the matter of Rome's public debt, 121.6 per cent of GDP and more than double the Maastricht ceiling of 60 per cent. But we are told, it is moving in the right direction (unlike Germany's rather less sinful 61.3 per cent which is in fact increasing).

But a euro without Germany is inconceivable. And for Italy, a founder member of the EU for whom participation in the euro is proof it belongs in the Premier League of European nations, missing the single currency launch would have been a terrible blow to the country's pride and self- respect.

Hence the challenge laid down yesterday by Romano Prodi, the Italian Prime Minister. In economic terms, Italy had met the spirit and the letter of the requirements, Mr Prodi said. Therefore any objections would have to be on political grounds. To which the EU Economic Affairs Commissioner, Yves-Thibault de Silguy, replied:"Don't worry." The final decision would be taken on economic grounds. It would not be "discriminatory."

A few hurdles remain. On 25 March, the European Commission will issue its recommendations, and two days later the Bundesbank, which has taken a jaundiced view of a "broad" and potentially softer Euro including Italy and Spain, will present its report on the matter.

This is the last real bump in the single currency's path, though probably not a big enough one to throw the project off course. The formal selection of participants will be made by EU finance ministers at the start of May.

But no one doubts the Euro will start on schedule in January 1999, or that it will have 11 members. The fighting henceforth will be over the details; in particular who will be President of the new European Central Bank, and the degree of political control over the ECB.

For the smooth run-up to the launch, Europe must offer special thanks to the business cycle. Inflation around the industrial world is minimal. At just the right moment, Germany and France, the two biggest economies, are gathering speed. Their expected growth of 2.5 to 3 per cent in 1998 will underpin EU expansion, helping to lift government revenues and reduce deficits everywhere.

The biggest risk to the euro now is a sudden slowdown that would see the weaker economies under intense pressures to take Maastricht-busting national measures to rekindle growth. Such a recession is unlikely, but not impossible.

For the "outs" and the "pre-ins" - Britain above all, but also Denmark, Sweden, and Greece inside the Union, and Switzerland and Norway who are not in the EU - the coming of the euro will further reduce the scope for independent economic management. Yesterday's figures banished what tiny doubts there were that come it will.

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