Europe's taskmaster fails his unruly troops

Comment

Schadenfreude is the only word for it. Germany, stern taskmaster for the fiscally unruly European troops, has itself failed the test. Shock, horror: its budget deficit in 1995 was 3.6 per cent of gross domestic product, well above the threshold of 3 per cent set by the Maastricht Treaty as a condition for entry into monetary union.

After all those finger-wagging lectures from Theo Waigel, Germany's neighbours will be forgiven a smirk of pleasure at the news that the self-styled paragon of fiscal austerity is now in detention. But writing out a hundred times that Germany, too, must do better won't solve the mismatch between rhetoric and reality over EMU.

Germany's failure to comply with the EMU deficit objective in 1995 reflected a combination of lower tax revenue than expected - something that has also hit the UK - and lower growth. Both are likely to worsen in 1996, with mandated tax cuts reducing revenue and growth likely to be still lower than the 1.9 per cent chalked up in 1995.

The race to meet the Maastricht convergence criteria is proving self- defeating. The squeeze on budget deficits is pushing down growth, which in turn is halting progress on the fiscal front. The only way out is further relaxation of monetary policy. But with the German mark and linked currencies still substantially over-valued against the dollar, even a further rate cut of 0.5 per cent by the German Bundesbank seems unlikely to be enough.

Like Theo Waigel's warning last autumn about Italian inability to make the Maastricht grade, the remarks of the Bundesbank Council member, Guntram Palm, about the possibility of delay to EMU are no more than the painful truth.

The response from the European Commission to calls for delay is always to point to the mandatory start date of 1 January 1999 for those member states which the council deems to qualify. But the very clause designed to bring this about as an alternative to the earlier option of 1997 provides a potential escape clause once the political will is there to exploit it. The odds on postponement are rising all the time. Expect a concerted effort to puff up EMU in the weeks ahead - but count your spoons.