TOWARDS EMU
Kicking and screaming into 1999
The Socialist victory in France and the German government’s row with its central bank raise the same question: will Europe’s planned single currency start on the due date of January 1st 1999? The answer is still probably yes—but it could have a blighted infancy
TWO gambles on either side of the Rhine have gone badly wrong. The more prominent was the decision by Jacques Chirac, the French president, to advance France’s parliamentary election from next March. Ostensibly this was to get the election over before next spring, when participation in the euro will be determined. More likely, Mr Chirac hoped that a renewed right-wing majority would be strong enough to push through further painful spending cuts or tax increases. These are needed to keep France’s budget deficit for 1997 below the 3% ceiling set by the Maastricht treaty.
Whatever the reasoning, the decision backfired with the election of a Socialist government—and, worse, one that will include members of a Communist Party vehemently opposed to the single currency. True, the euro barely surfaced as an election issue and the Socialists claim to support it. But Lionel Jospin, the new prime minister, repeatedly declared during the campaign that he would not impose further austerity measures to meet the Maastricht targets. He also set four new conditions for backing the single currency: there should be an “economic government” to watch over the supposedly-independent European Central Bank; there should be a growth pact to stimulate employment; the euro should not be overvalued against the dollar; and Italy and Spain must be in the first wave. Mr Jospin, it might seem, believes six impossible things before breakfast.
Since the election, he has said he wants to stick to the Maastricht timetable, mindful that under France’s practice of cohabitation foreign policy is shared with the president (though whether EMU is a foreign or a domestic matter is unclear). What seems certain is that the Socialists’ leader can be expected to try to implement his conditions. He has also suggested that the “stability pact” agreed upon in December should be renegotiated. The stability pact aims to constrain participants’ budget deficits after EMU begins to under 3% of GDP, on pain of swingeing fines for defaulters. The two regulations giving effect to the pact still have to be adopted formally—and the more significant of them requires unanimous support from member governments.
Meanwhile, in Germany, a gamble on the euro has also blown up in the government’s face, though for different reasons. There Helmut Kohl, the chancellor, and Theo Waigel, his finance minister, have been forced to back down in a public row with the Bundesbank, the central bank, over a revaluation of the country’s gold reserves—and, by extension, over how to achieve a stable euro. Since the project was launched in 1991, the government has repeatedly assured a sceptical public that the euro will be as strong as the beloved D-mark, which is being sacrificed to make way for it. That means, ministers have insisted, the strictest possible interpretation of the Maastricht criteria; untrammelled independence for the European Central Bank; and strict enforcement of the stability pact. The German constitutional court has also insisted, in its ruling on the constitutionality of Maastricht, on a strict application of the treaty and its criteria.
The problem for Mr Kohl is that it has become ever more obvious that Germany is itself likely to breach the 3% ceiling on the budget deficit for 1997, the year to which the Maastricht criteria are to be applied. It will also breach a similar Maastricht ceiling on public debt, which is supposed to be less than 60% of GDP. Hence Mr Waigel’s gold gamble. The idea was that Germany’s massive (and massively undervalued) gold reserves, which are held by the Bundesbank, should be revalued closer to market prices. The resultant profit would be handed to the government as a special dividend and used to pay off debt incurred to finance transfers to eastern Germany. That would reduce public debt and also the deficit (though much would depend on the transaction’s accounting treatment), enabling Germany to comply with the Maastricht criteria after all.
But Mr Kohl’s gamble has gone awry too, albeit less spectacularly than Mr Chirac’s. The Bundesbank denounced the plan as the worst sort of creative accounting. If Germany indulged itself like this, it asked, how could it attack the accounting tricks of others? Especially, the central bank did not need to add, the Italians, whom most Germans do not trust as potential sharers of the same currency.
With the press, opposition politicians and even some of Mr Kohl’s own supporters siding with the central bankers, Mr Waigel was forced to negotiate an ignominious compromise with Hans Tietmeyer, the Bundesbank’s president, that puts off the proceeds from a gold revaluation until 1998. Mr Waigel got something from the compromise but the deal leaves a shaken coalition struggling to find some other way of plugging the budget hole. Most analysts expect it to fail, which would leave the deficit for 1997 embarrassingly above 3%. For Mr Kohl, who has rarely put a foot wrong over Europe, the stumble was extraordinary. The decision to pick a fight with the Bundesbank—and, still more, the loss of that fight—has dimmed his aura of invulnerability, with what effect remains to be seen.
The shenanigans in France and Germany have overshadowed all other business in the European Union. The Amsterdam summit comes on June 16th-17th; it is due to adopt a new treaty, revising the one signed at Maastricht. Six months later, negotiations on the enlargement of the EU are due to begin. But the fate of the single currency matters more for the Union’s future than either of these. Indeed, such is the political capital now invested in the euro that, illogical as it may seem, it is not at all easy to envisage enlargement going ahead smoothly—or even at all—were the single currency to fail.
The Scylla of flexibility
Not surprisingly, the combination of the French election upset and Germany’s gold row has rekindled speculation that the single currency could be delayed for a year or two, or even scrapped. If it does go ahead on time, the argument runs, this will be possible only if the Maastricht criteria are fudged—and that must mean letting in Italy, Spain and Portugal, and Uncle Tom Cobbleigh. That would surely mean that the euro ends up as a soft currency and possibly an unstable one. Things could turn out that way. But they do not have to.
Whatever Mr Jospin said on the campaign trail, his government’s approach to the single currency is bound to be coloured by recent experience. In the early Mitterrand years, France tried “the Albanian solution”—going it alone, reflating and letting the franc go hang. That proved unsustainable, and after 1983 France adopted the policy of the franc fort. Since then various governments, beset by intractable unemployment and yet unwilling to deregulate the economy, have toyed with the idea of changing tack again. All have concluded they cannot. After every wobble—most recently when Mr Chirac thought about opposing the euro before the 1995 presidential campaign—pursuit of the single currency has re-emerged as the central element of French policy.
The new Socialist government, which is advised by Jacques Delors, the former president of the European Commission and one of the single currency’s inventors, may follow suit. Certainly, it will not wish to derail the euro. Nor must Mr Jospin’s conditions necessarily have that effect. It has already been agreed that a “stability council” of euro members’ finance ministers should act as the interlocutor for the European Central Bank—and thus as a political counterweight to it.
Turning this into something that could be deemed an “economic government” would not be hard, and might not bother the Germans unduly, so long as the central bank’s independent control of monetary policy is unaffected (ie, so long as the political counterweight is a feather). Paradoxically, some Germans might even welcome European political involvement in, say, fiscal policy, since that would speed up political union in Europe, which is what Chancellor Kohl wants EMU for in the first place.
Attempts to renegotiate the stability pact will, admittedly, be resisted by the Germans. Yet it has already been watered down to meet French objections, making any fines not automatic but subject to approval by governments. Further tinkering might be acceptable. Nobody in Europe wants the euro to be overvalued against the dollar (though, in making this a “condition”, Mr Jospin was implicitly infringing the central bank’s independence in such matters of monetary policy). Similarly, nobody disputes the need to foster growth and employment. The revised Maastricht treaty will include a wordy employment chapter for this purpose.
It will be harder to cope with Mr Jospin’s insistence on no new austerity measures, especially if the French budget deficit begins to rise. Yet the Maastricht criteria are not quite as rigid as many suppose—or as the Bundesbank might wish. The 3% ceiling on the budget deficit may be breached so long as the deficit has come down substantially and is close to the required level; or so long as any excess is temporary and exceptional. Even the Bundesbank concedes that this wording falls short of insisting that 3% means 3.0% and not a pfennig more. Most forecasts of EU deficits suggest that they will be both falling and reasonably close to the target, though few expect them actually to hit 3.0% in 1997 (see table).
