Single currency to be policed by `stability council'

BUILDING EUROPE

MARY DEJEVSKY

Laval

France and Germany have agreed on the formation of a "stability council" to police the operation of the single European currency once it has been introduced.

The agreement, along the lines of the "stability pact" proposed by the German finance minister, Theo Waigel, last year, was reached at a meeting of French and German ministers and central bankers yesterday and is likely to include financial sanctions against countries that breach the terms of the single currency once they have joined.

It would create a new tier of decision-making in the EU, beyond the present Council of Ministers - and countries like Britain, which do not plan to join the single currency, would be excluded from it.

The ministers - meeting in Laval, the home town of Jean Arthuis, the French finance minister, west of Paris - also called for a new European Exchange Rate Mechanism to prevent or discourage countries inside the European Union but outside the single currency from devaluing their currencies against the euro. It would allow for "intervention by the European central bank, with the euro as the anchor point," Mr Arthuis said.

France, in particular, has long expressed concern thatcompetitive devaluation by EU countries remaining outside the single currency - probably including Britain and Italy - could penalise those countries that have introduced the euro and jeopardise the project.

Last month, the French prime minister, Alain Juppe, went so far as to say that the single currency would not work without such a mechanism. Yesterday, however, in a gesture clearly intended to underline France's determination to meet the single currency criteria by the 1 January 1999 deadline, Mr Juppe circulated all government ministers and local administrations with instructions to ensure that their preparations for introducing the euro were on schedule to meet the target date of 1 July 2002.

The same message emerged from the French and German finance ministers' meeting, with upbeat assessments from both sides not only about their prospects of meeting the single currency criteria on time, but also about the "temporary" nature of the recent recession and the "hopeful" signs already manifesting themselves.

It was the stability pact, however, on which most progress seemed to have been made. According to Mr Arthuis, the pact would be controlled by a "stability council" comprising heads of central banks and finance ministers of the single currency countries.

The central bankers would be responsible for monitoring price movements and monetary policy in those countries, while the finance ministers would observe budgetary and monetary policy. "We are talking about a council made up of ministers in the third phase [of European monetary union]," said Mr Arthuis.

Any country failing to meet the original Maastricht criteria could be liable for sanctions. Mr Waigel said that he strongly favoured "automatic sanctions" because then they would not have be discussed with relation to a particular country. He stressed that the nature of sanctions was still under discussion and the strong inference was that the automatic principle was not acceptable to France.

This difference aside, Mr Waigel was clearly delighted by France's acceptance of his stability pact idea and stressed that it was intended "not to change the Maastricht treaty but to ensure that Maastricht criteria are observed over the long term".

Germany has continually expressed concern that countries might meet the criteria for joining the single currency by the1999 deadline, but that there was then no mechanism to prevent them from backsliding.