EUROPE
The single currency
Euro-go-go
B R U S S E L S
Why Europe’s single-currency plan is now quite a bit more likely to be carried out on time
Timing is crucial for Helmut Kohl
Steady on. Euro members would always have had to fix their bilateral exchange rates some time before January 1st 1999, when the single currency is to come into being. Doing so several months early does not advance the euro; it is meant merely to ward off speculative attacks on prospective members’ currencies. Conversion rates into the euro itself cannot be fixed until the last day of 1998, because the euro must by law be equal to Europe’s present currency unit, the ecu—and that unfortunately includes three currencies that are unlikely to be in the euro: Britain’s, Denmark’s and Greece’s.
Speculators may not, however, be so easily defeated, as anyone seared by the blowing apart of Europe’s exchange-rate mechanism in 1992-93 must know. The only thing guaranteed to deter speculation is market confidence that both the euro’s membership and the bilateral rates are sustainable. The presumption is that the rates will be the current central ones in the revived exchange-rate mechanism. Most currencies are trading close to these now, though Ireland, whose currency is 10% above its central rate, may have to revalue. Yet 15 months is a long time in financial markets: it would be premature to dismiss the risk of some speculative attack on the euro’s prospective members next year, or even after the euro has begun.
Expectations that the euro will be launched on time have nevertheless risen, largely for reasons unconnected to the ministers’ decision. As the moment approaches, delay has come to seem less appealing. There has also been a partial turnaround in the central country, Germany (see article). Several big hitters, including no fewer than four of Germany’s state premiers, still favour delaying the euro. But the chancellor, Helmut Kohl, has set his face firmly against it. On September 16th, a strategy paper by four leading members of Germany’s ruling coalition argued strongly against delay.
It helps that, thanks largely to a stronger recovery, forecasts now suggest that Germany may, after all, come under the 3% barrier. The same may be true of France and Spain. Even Italy is hoping that, thanks to its 57 varieties of one-off measures, it will squeeze its 1997 deficit close enough to 3%. The German paper implies that Italy is likely to join the euro, something the Germans have previously resisted. Yet Italian membership is still questionable. The EU’s euro-buffs are watching the prospective Italian deficit for 1998 carefully, and have pointed out that further budget cuts worth as much as 1.2% of GDP may yet have to replace one-off measures.
The odds must now favour a euro starting on time with all EU members bar Britain, Sweden, Denmark and Greece. Attention then shifts to another issue: how the euro will be run. The French still hanker after a political counterweight to the European Central Bank. Dominique Strauss-Kahn, France’s finance minister, insists that, although this counterweight should be informal, it should also be “visible and legitimate”. Yet he conceded at the weekend meeting that political intervention in the euro’s exchange-rate policy should happen only rarely.
The growing likelihood of an on-time euro may prove awkward for the British, too. Under the treaty, Britain is meant to decide by the end of 1997 whether it wants to join in the first wave. The assumption is that it will not. Yet there are signs that the British government may stir up a fresh debate on the single currency, perhaps to raise the prospect of Britain joining a couple of years later. The desire not to be left behind while others invent the euro’s rules is strong; some Labour tacticians also reckon that joining the euro could irrevocably split the Tory party. The irony is that next May’s decisions on the first wave will be taken when Britain holds the EU’s presidency.
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