The Economist

All—almost all—on course for the euro

B R U S S E L S

ALL this year, prospects for the single currency, the euro, have been clouded by budget worries. Yet now, at the 11th hour, these seem to have been dispelled. The forecasts that Yves-Thibault de Silguy, Europe’s commissioner for monetary affairs, put out on October 14th show all EU countries except Greece and, in a much closer call, France producing budget deficits of less than the permissable maximum of 3% of GDP in 1997. For 1998, all countries bar Italy will, the commission thinks, do the same (see table).

On this basis, the commission reckons that as many as 14 countries should qualify (including France, the noting of whose tiny excess in 1997 is perhaps intended to encourage its finance ministry to limit spending). Italy remains the most dubious but, if it cuts its deficit for 1998, it too could make it. With Denmark, Sweden and Britain choosing to stand outside, that means 11 firm runners—subject to two questions.

The first is: are the figures believable? There were justifiable doubts last spring, when the commission predicted that ten countries would qualify. Soon afterwards, Germany and France admitted that their budget deficits would stray over 3% of GDP, fomenting talk of delaying the euro. But thanks mainly to unexpectedly robust growth, the latest commission figures look more plausible. They certainly should be for 1997, since it is three-quarters over. Decisions on which countries qualify for the euro will be taken next spring on the basis of actual 1997 statistics—though with forecasts for 1998 taken into account, to make sure that convergence is “sustainable”.

Even so, passing tests laid down at Maastricht will not be a foregone conclusion. Several countries besides France remain perilously close to the 3% ceiling; and, despite some flexibility in the treaty’s wording, the Germans still profess to insist on strictness. Most countries are also well over Maastricht’s 60% ceiling on public debt, though the commission is elastic in interpreting this condition.

The second question is Italy. Even though it may pass muster for 1997, it must still adopt a tough budget for 1998 to do the same for that year and 1999. A failure might relieve the Germans, who have always doubted Italy’s fitness for the single currency. Yet a footnote to the commission forecasts says that, if the Italian government pushes through the draft budget that caused Romano Prodi’s coalition almost to collapse last week, the 1998 deficit might fall as low as 2.7%. Even allowing for Mr Prodi’s latest concessions to the hardline Communists who generally back (but are not in) his coalition, it should still cut the deficit to under 3%.

The conclusion is clear. So long as Mr Prodi gets something reasonably close to his original draft 1998 budget, it will be hard for the Germans—or anyone else—to keep Italy out. What such a wide membership will do for the euro’s credibility remains to be seen.

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