Tougher EU cuts about to bite

Strike protests as wages are frozen ready for single currency

European Union governments pressed ahead with strict austerity measures yesterday, determined to resist increasing opposition from their workforces and to fulfil the conditions for launching a single currency in 1999. Governments in Belgium, France, Germany, Italy and Spain have all introduced, or are about to introduce, some of the toughest spending cuts in decades in order to reduce their budget deficits to the level required to participate in European economic and monetary union (EMU).

Spain's conservative government yesterday presented to parliament the most restrictive budget since the return of democracy in 1975. Despite an unemployment rate of 22.3 per cent, all areas of state spending except health, pensions and regional transfers are to be cut or kept at current levels, and the wages of millions of state employees are being frozen.

Thousands of public sector workers, including those from two police unions, whistled and chanted slogans outside the Economy Ministry in Madrid and even tipped a lorryload of ice at the ministry's entrance in protest. The unions plan a national "day of action" on 15 October and more protests if their complaints are not addressed.

However, the Prime Minister, Jose Maria Aznar, insists that nothing will deflect him from his goal of making Spain one of the founders of the euro, as the single currency is to be called. He suspects that, if Spain is not there at the start, it will pay a heavy price in terms of economic prosperity and political influence in Europe.

In France, where a big civil service strike has been called for 17 October, tens of thousands of teachers stopped work for one day yesterday in protest at government plans to abolish about 2,300 jobs in the education system and forced the closure of hundreds of schools.

As in Spain, President Jacques Chirac's Gaullist-led government is slashing state spending to reduce the French budget deficit to 3 per cent of Gross Domestic Product in 1997. This would enable France to meet the Maastricht treaty's criteria for participating in EMU in 1999, but some critics say it is too deflationary a policy when unemployment is 12.6 per cent and the economy this year is expected barely to grow at all. If the government achieves its deficit target, it will be partly because of unusual accounting manoeuvres such as the transfer of 37.5bn francs (pounds 4.8bn) to state coffers in return for the government's taking over of certain pension liabilities from France Telecom. This sum represents about 0.5 per cent of French GDP, making it more likely that France will be close enough to the 3 per cent deficit target to qualify for EMU.

The European Commission has signalled it will approve the manoeuvre, not least because EMU is unthinkable unless France takes part. Yet it seems clear from Italy's 1997 budget that Rome would like to perform similar sleights of hand in order to be in the single currency from the start.

That bothers those central bankers and finance ministers who oppose the inclusion in EMU of countries with a track record of currency instability and fiscal extravagance. On the other hand, as the former editor of La Repubblica , Eugenio Scalfari, recently noted, the political implications of Italy's exclusion from the single currency could be enormous.

"It's clear that the outcome would be catastrophic for Italy," he said. Among the possible consequences would be the collapse of the lira, soaring inflation, and a more concerted push by the regionalist Northern League to force the secession of rich northern Italy from the poorer south. Italy has so far largely escaped the social unrest evident in other budget-cutting European countries, but in Germany more than 5,000 Mercedes-Benz workers went on strike yesterday in a growing dispute over government cuts in sick pay entitlement. The giant engineering workers' union, IG Metall, has called for a full day of protest on 24 October.

Chancellor Helmut Kohl's government has already secured the passage of key parts of its 1997 austerity programme, but at the cost of rising trade union discontent. Belgium's Christian Socialist Prime Minister, Jean- Luc Dehaene, has gone to the extremes of acquiring special powers to legislate by decree on the budget so that Belgium can join the euro.