IMF says monetary union will hit growth

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The Independent Online
THE CAMPAIGN to ratify the Maastricht treaty on European union suffered a setback yesterday, when a leading Paris daily newspaper published figures showing the move towards monetary union would mean lower growth all over Europe.

Details published in Liberation and attributed to the International Monetary Fund in Washington show that across the EC, the 'secret bill of Maastricht' could be a cut in economic growth of between 0.4 and 0.8 percentage points a year. The IMF study is a simulation prepared in advance of the Fund's World Economic Outlook, the leading international forecast.

The European Commission in Brussels yesterday dismissed the IMF study as 'extreme' and 'unrealistic'. But the Commission's sources hinted that its own economists, using similar assumptions, had privately come up with a figure of 0.4 per cent annual growth lost in the coming three years.

The news may have a sharp impact on the debate in France in advance of its September Maastricht referendum.

The damage would be worst in Italy, where growth could be cut by 3.4 percentage points between now and 1996. It would be almost as bad in Belgium, milder in France and almost negligible in Britain. According to the more optimistic of two scenarios - which assumes confident financial markets - Britain might suffer no 'Maastricht effect' at all.

It is the project of European monetary union that is to blame. In order to make a single currency work, the EC's 12 members will have to give up spending their way out of recessions and using inflation to generate economic growth.

The blueprint for monetary union includes 'convergence criteria' that will decide who is allowed to join the new single currency towards the end of the century. They include an inflation rate not more than 1.5 points higher than the average of the EC's three least inflationary countries; an annual budget deficit lower than 3 per cent of gross national product; and a total outstanding public debt of less than 60 per cent of GNP. In the long term, sounder public finances will make Europe richer. But meeting the criteria is already forcing higher interest rates and lower public spending all across Europe. Only France, Britain, Germany and Denmark are already within sight of satisfying the three tests; elsewhere, the move to a single currency will mean five years of economic pain.

Yesterday's figures make the crucial assumption that the EC takes the medicine quickly and that, by 1996, even the spendthrift Italians have knocked their public finances into shape. In fact, few experts believe Italy is ready to act. But if Europe refuses to accept a hefty dose of financial austerity, monetary union may remain for ever a dream.