EUROPEAN Union finance ministers are close to agreement on the rules which members of the single currency will have to adhere to after monetary union takes place in 1999.
As the 15 finance ministers met for drinks in Kitty O'Shea's bar in Dublin last night, European Finance Commissioner Mr Yves Thibault de Silguy was confident that agreement would be reached on the so called "stability pact", the rules which member states of the monetary union must meet and one of the most contentious issues which remains to be agreed.
However, Government sources pointed out last night that Germany was still keen to take a tougher line and played down the likelihood of a full agreement this weekend.
Mr de Silguy said he and the Minister for Finance, Mr Quinn, expect broad agreement on all three main issues surrounding monetary union at the informal Ecofin summit in Dublin Castle today.
The three main issues are the stability pact, to ensure countries maintain budgetary discipline after monetary union, the relationship between the currency inside the ERM and those outside and legal issues surrounding the introduction of the euro.
Mr Quinn has said the stability pact would be the most difficult to negotiate, but Mr de Silguy is now optimistic that the different states have reached broad agreement. Germany, however, is understood to be still keen to have a more hard line position than the others are prepared to accept.
The proposals, which Mr de Silguy now expects to be ratified, concern fines for any EMU country whose budget deficit rises above 3 per cent. A "stability council" will give countries nine months to put a corrective programme in place. If this has not happened, they will be fined 0.2 per cent of gross domestic product. An additional fine of 0.1 per cent of GDP will be levied for every point a country's deficit is above 3 per cent.
For example, if the deficit is 4 per cent the fine will be 0.2 per cent plus 0.1 per cent, while if it is 5 per cent the fine will he 0.2 per cent plus 0.2 per cent. This continues up to a maximum of 0.5 per cent. The money will be held in deposits for the Commission Budget. However, if the country has rectified the situation within a year the money will be given back to the individual state.
It is not yet clear what "exceptional circumstances" will mean in terms of avoiding the fine. Germany is pushing for the most restrictive rules the others, will accept, while the Commission is anxious to maintain a clause where countries can escape sanctions if the economy is in a severe recession. Others, including Ireland, feel that it is impossible to legislate in advance for shocks, such as the current beef crisis.
Agreement will also he reached on the establishment of an ERM II, Mr de Silguy said. This would regulate how far those countries which are not part of the euro bloc can deviate from the euro. The width of the bands has yet to be agreed, as ministers are reluctant to set up targets for the financial markets to shoot down.
The one country which could hold up agreement here is France which is keen to tie in currencies outside monetary union as much as possible. A compromise along the lines of "need to study the subject of excessive fluctuations (devaluations) further" would probably keep them happy, sources said.
The system will be very similar to the one in operation at the moment but multi lateral surveillance - the overseeing of national economic policies by the EU Commission and other member states - will be significantly strengthened.
Broad bands of around 15 per cent are also likely, although countries will be able to opt to move into a narrower band as they approach the deadline for joining the euro bloc. It is also likely to be agreed that the European Central Bank will be responsible for all interventions to support ERM currencies.
One area where agreement would not be so easy are the legal issues surrounding the introduction of the euro, the commissioner added. At the moment all the countries which would be in the first phase of the single currency and the revamped ERM will have a say in the rules of play. Several countries are unhappy about this and agreement is not expected until October or November.
Mr de Silguy also said that both Germany and France would post economic growth of around 1 per cent this year, despite the fall in French GDP in the last quarter. Over lunch, ministers will be given a run down of the EMI's and Commission's predictions for the year, well in advance of the normal October or November publication date. Mr de Silguy added that both Germany and France will also have inflation around 1 per cent at the end of the year, with budget deficits around 4 per cent, one percentage point above the Maastricht guidelines levels.
