Monetary union could be a reckless gamble, warns Eddie George
Tuesday 04 February 1997
But at the same time Eddie George, the Governor of the Bank of England, warned of the dangers of a single currency that was built on weak foundations, and German bankers said they hoped countries like Italy would not be allowed into Economic and Monetary Union.
The Maastricht treaty created a series of economic tests which countries must pass in order to qualify for monetary union, and bankers are concerned that those tests must be strictly applied. They want to see convergence - evidence that Europe's economies are coming into line with each other.
In pursuit of that goal, Italy was yesterday given the go-ahead to set up a new system of accounting which is expected to reduce the country's budget deficit enough to meet the Maastricht ceiling.
The finding, from Eurostat, the EU's statistical office, could prove crucial in determining whether Italy qualifies for membership of the first wave of monetary union. But it is likely to fuel controversy over whether budget rigging is being allowed in order to ensure countries qualify.
The Italian Treasury predicted that the ruling would help the country make the EMU grade. Clearly delighted that it had been cleared of "creative accounting" the Treasury statement said the decision "proves that Italy has not adopted any illegal measures to improve its accounts, nor does it intend to in the future". The experts found that Italy was within its rights to defer interest payments on certain types of government bonds, thereby allowing a deficit reduction in 1997 of 0.26 per cent of gross domestic product.
In November the European Commission forecast that Italy's deficit would stand at 3.3 per cent of GDP in 1997 - above the Maastricht ceiling of 3 per cent. However the commission noted at the time that a favourable ruling on the bond interest payments could bring Italy into line.
The Eurostat statement yesterday is the first of a series of rulings on whether certain accounting methods should be allowed. Germany, which has already called for the strictest application of the economic convergence criteria, is likely to look askance at yesterday's finding. The government and the Bundesbank are concerned about allowing weaker economies into EMU.
The Bank of England is also worried. Mr George said last night that it was vital that the convergence tests be strictly applied. Speaking to the Bankers Club Annual Banquet at the Guildhall in the City of London, Mr George emphasised the risks of joining EMU, and downplayed possible dangers for Britain in remaining outside a European single currency bloc.
He said: "It would be a mistake in my view for monetary union to go ahead without reasonable confidence of genuine, sustainable, convergence between its members."
The Governor avoided discussing what would count as genuine convergence, hinting that the current criteria in the Maastricht treaty might not be enough to ensure the smooth functioning of the euro. Nevertheless, he said, "it would be a reckless gamble to charge ahead if even those criteria were not met sustainably, and in substance rather than just form". Senior German bankers also sounded a warning.
The financial markets are also nervous about early Italian membership of EMU, which could weaken the euro. "If Italy and certain other countries are in, a time bomb is ticking within EMU," Deutsche Bank board member Ulrich Cartellieri said at the annual World Economic Forum in Davos, Switzerland. "The fiscal success that the government in Rome has enjoyed recently cannot be maintained in the long run."
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