Brussels praises new currency hopefuls

Countdown to money union: Brussels gives encouragement on budgeting but forerunner of the central banks is sceptical
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The European Commission yesterday sought to build up the momentum behind a single currency, announcing that 12 of 15 EU members will this year prove fit to qualify for monetary union.

Even Spain is expected to meet the budget deficit rules in 1997, placing it among the qualifiers for the first wave of EMU, due to start in January 1999.

According to the Commission's autumn forecasts, Britain is not among the 12 expected to make the grade in 1997. The British budget deficit for 1997 is estimated to be 3.5 per cent of GDP, and therefore above the 3 per cent Maastricht rule. However, Yves Thibault de Silguy, the economics commissioner, said yesterday that the British deficit had been hard to assess ahead of the Budget, and he made clear that the likelihood was that Britain, too, would be among the qualifiers.

The only countries still firmly outside the EMU "ins", on current commission estimates, are Italy and Greece. However, the commission even held out hope for Italy, saying that its economic outlook could improve sharply as new budget measures took effect. The final decision on which countries qualify will be taken in spring 1998, based on the final economic figures for 1997.

But the commission's rosy forecasts are certain to be viewed with scepticism elsewhere. On the day the commission produced its figures in Brussels, a different analysis was emerging in Frankfurt from the European Monetary Institute, the forerunner of a European central bank.

The cautious tone of the institute's report was in clear contrast to the commission's optimism. The message was that governments' progress on cutting deficits had been too slow, and most had not yet got their finances into a sustainable state.

There has been mounting nervousness in several quarters about the apparent readiness to "fudge" economic figures in order to ensure that certain key countries are brought into line. In particular, controversy has surrounded a transaction involving France Telecom, aimed at boosting the French budget figures for 1997. The report contained a side-swipe at the commission for its approval of the transfer of 37.5bn francs of France Telecom funds to the French government budget. This did not help to ensure a sustainable position, the institute said.

It accused governments of lacking the will to tackle underlying fiscal problems, caused by high unemployment and a growing pension burden, which were not related to the Maastricht criteria. These challenges could not be resolved by short-term budget fixes.

Only three countries - France, Luxembourg and the UK - would have debt below the 60 per cent of GDP Maastricht ceiling in 1996. Four - Denmark, Ireland, Luxembourg and the Netherlands - would meet the 3 per cent deficit target. On the other hand, a majority of states were likely to satisfy the requirements for convergence of their interest and inflation rates.

The EU's bureaucracy, however, is constantly driving member states forwards towards their EMU goal, and it rarely allows its forecasts to be buffeted by doubts or questions from beyond the Brussels ring.

Yesterday's optimistic predictions were based largely on a very rosy assessment of European growth in the run-up to the EMU launch. In 1996 GDP is expected to rise by 1.7 per cent, accelerating next year to 2.3 per cent and to 2.8 per cent in 1998. Between 1996 and 1998 there will be a net increase of 2.3 million jobs, bringing the overall unemployment rate down to 10.4 per cent, the commission said. "The European economy is emerging from a period of weak growth that started in mid 1995," it added.

To the commission the reason for the hopeful outlook is clear: It is because countries have been obeying the Maastricht economic criteria. But the commission sends a warning to any EMU backsliders that reduced commitment to monetary union could impair growth.