The euro: your flexible friend

Dublin summit: Germans bow to French demands on `stability pact' to police single currency

A hard-fought deal on how to police the future single currency was finally achieved at the European summit in Dublin yesterday, giving important new impetus to monetary union.

Germany, which has been insisting on the strictest rules for a "stability pact", had to bow to French demands for a more flexible system. The stability pact will be the rule book for countries inside the euro-zone, setting out a system of fines and penalties to be levied against erring countries.

Theo Waigel, the German finance minister, yesterday declared that the rules would mean that the euro would be "a strong currency". Germany won agreement that countries could be excused fines for exceeding budget deficit rules only in the case of very deep recession, exceeding 2 per cent negative growth. Mr Waigel rejected suggestions that Germany's hard line was an attempt to dominate decision-making, saying that it was not some "Teutonic stability craze".

However, a last-minute compromise formula allowed France to claim that it had won some concessions from Bonn. France and other member states have argued that a degree of political control and flexibility should be introduced. France is concerned that the single currency will be controlled solely by technocrats and bankers inside a European Central Bank.

However, Helmut Kohl, the German chancellor, was determined to maintain a tough negotiating stance in order to shore up confidence among the German public. Latest opinion polls show as few as 16 per cent of Germans support the euro.

There were already signs yesterday that leaders were moving on to discuss the next contentious issue: who should enforce the fines. Under the Maastricht treaty it is envisaged that finance ministers will act as judges of recalcitrant member states. But proposals for a wider informal economic government - termed a "stability council" - are gathering pace.

Negotiations on the final stability pact deal were long and tense. All member states agreed that countries which allow their public deficits to exceed 3 per cent of gross domestic product after the launch of the euro should be subject to penalty procedures. Each would have to submit its budget proposals to the European Commission and European finance ministers would hear commission recommendations on which countries were running out of line.

Kenneth Clarke, the Chancellor, has won assurances that the rules and fines would not affect Britain if it does not join the euro.

The dispute which climaxed in Dublin arose over when exceptions could be made, allowing countries to escape fines, because of exceptional circumstances, such as recession or natural disasters.

In the final deal, Germany achieved its desired 2 per cent upper limit. However, agreement was reached that countries whose economies hit recession should be allowed to argue "exceptional circumstances" on a case- by- case basis - so France had its bottom line written into the deal. However, in an addendum, the countries did agree that they would endeavour not to argue exceptional circumstances for negative growth of up to 0.75 per cent.

The decision on whether to let individual countries off the fines procedures would be decided by a qualified majority vote among finance ministers.