Introduction of euro may to be delayed

THE European single currency looks increasingly unlikely to go ahead on time after the Germans said yesterday they will fail to meet the Maastricht requirements for their budget deficit this year.

And economists in Dublin have warned that any serious delay to the timetable could cause currency turbulence and a fallout across European markets.

The annual report on the German economy states that the budget deficit is likely to rise to around 3.5 per cent of gross domestic product (GDP), above the Maastricht limit of 3 per cent which Ireland comfortably meets.

The decision on which countries qualify as founders of a single currency in 1999 will be based on 1997 statistics, so the Germans have another year to rein back their deficit to meet the Maastricht guidelines.

However, economists are now questioning whether France has any hope of meeting the criteria if the mighty Germans are having trouble. Moreover, all are agreed that the single currency will not go ahead without both the French and Germans involved.

Mr Malcolm Barr, international economist at Chemical Bank in London, said Germany's inability to meet the criteria in 1996 was symptomatic of the problem of flagging economies across most of Europe.

"The problems are much more, significant for France," he said. "France is likely to have a budget deficit around 4.6 per cent to 4.8 per cent of gross domestic product (GDP). It will be nigh on impossible for them to reach 3 per cent when the economy is slowing."

The Germans problems stem from the rise of the deutschmark over the last year which has put the brakes on economic activity. Either the criteria must be loosened to allow them to qualify or the deutschmark's value will have to fall to boost growth, said Mr John Beggs, chief economist at AIB Treasury.

The former French president, Mr Valery Giscard d'Estang, outlined plans earlier this week for a relaxing of the criteria. However, the German foreign minister, Mr Klaus Kinkel, and the French prime minister, Mr Alain Juppe, both rejected the proposal.

The German finance minister, Mr Theo Waigel, also insisted yesterday that meeting criteria on budget deficits and inflation would determine which European Union countries would adopt a single currency. "Even Germany must make greater efforts to meet the criteria.

European Union officials also insisted that Germany and France were not near to reaching a decision to delay the single currency.

"If the criteria are not relaxed it could mean only Ireland and Luxembourg would be eligible to join, said Mr Beggs. "That means it would have to be delayed. The authorities are going to have to face up to this over the coming months."

Despite this, the fall out from a delay on Maastricht could be catastrophic, Mr Beggs warned. "There is no doubt that interest rates and that there would be a big fallout in the markets."

"There would also be a flight to the deutschmark and the other European currencies would suffer and probably be devalued. It all depends on whether it is an orderly postponement or whether it looks as if the single currency is off the agenda altogether."

Mr Beggs added that, even if the Maastricht timetable is postponed, the Irish authorities will "keep their heads down". They are determined that Ireland will come out absolutely on target no matter what, he, said. "And the electorate generally agrees on that. Even if they would like lower taxes.

So the Irish authorities are likely, to remain focused on the mark rather than on sterling. "The Central Bank definitely wants the pound to reach 2,3800 deutschmarks, where it was over a year ago," said Mr Dermot O'Brien, economist with NCB Stockbrokers.

"The sterling exchange rate is important. They don't even want hint that they may be sterling."

In trading yesterday, the pound closed at 103.70p sterling from 103.68 on Thursday as the deutschmark continued to gain across Europe after a stronger than expected growth in the money supply in December.

The M3 money supply grew by 2.5 per cent and economists said the strong number may reduce the likelihood of a decline in official interests rates in early spring.

That would mean there would be no early cut in Irish retail rates as the Central Bank will wait for the Bundesbank to move, they added.