Concern about EMU target date dismissed

FRANCE and Germany yesterday brushed aside doubts about their ability to launch European Monetary Union on schedule, and issued a joint call for a stability pact for member states after 1999.

At a meeting in Kempten, southern Germany, the two countries' finance ministers and the heads of the central banks resolved to keep monetary union on track without watering down the entrance criteria. They also pledged to adhere to the conditions laid down in the Maastricht Treaty. The two countries will jointly propose a "stability pact" at this Saturday's EU finance ministers' meeting in Dublin.

Mr Jean Arthuis, the French finance minister, and Mr Theo Waigel, his German counterpart, met amid rumours that Paris and Bonn had struck a deal to relax the Maastricht criteria.

Last week, Germany passed a budget that might bring the deficit to below 3 per cent of GDP, but it will still fail to meet the second target keeping public debt below 60 per cent of GDP.

French assurances that Paris will be on the starting line are even more whimsical. The French budget, to be outlined today is expected to paper over many cracks in an attempt to reach the magic 3 per cent figure. The government has based its revenue forecast for next year on an economic growth rate of 2.5 per cent, described by most economists as wildly optimistic.

Paris is also likely to perform some conjuring tricks, transferring pension funds into government coffers in a transparent attempt to massage the public debt figures. Next year's performance will determine which country can join EMU in 1997, or, in the case of Germany and France, whether it can begin on time.

However obvious it may seem, both finance ministers vehemently denied yesterday that reaching the Maastricht goal was proving a strain. But talk of a "stability pact" was couched in much vaguer terms than a year ago, when Germany felt it could dictate fiscal policy to other EU states.

Since then, Germany has busted the budget once, and is set to bust it again this year. Instead of calling for punitive fines on miscreant governments, Germany pins its own hopes of entry on some creative accounting.

While Germany would be loath to use the word "flexibility" in its vocabulary, Bonn officials have recently been re-reading the Treaty in a frantic search for loopholes. They have discovered that the figures can be interpreted as mere guidelines. The common wisdom now is that Germany will scrape in, give or take a few tenths of a percentage point, but that France will need more help from the accountants. German Chancellor, Dr Helmut Kohl expressed confidence yesterday that EMU would begin in 1999 with five member states.

The U-turn in Bonn has alarmed Germany's central bankers. Dr Hans Tietmeyer, the head of the Bundesbank, voiced his anxiety yesterday about the danger of the political will triumphing over financial sense. "Monetary union must rest on solid foundations," he said.

But even Dr Tietmeyer has become somewhat vague of late about the precise conditions for EMU. At a symposium last week, he implied that an applicant's general state of fiscal health was more important than arbitrary figures. If the Bundesbank is prepared to turn a blind eye, who is to stop everybody else from doing the same?