Political imperative is to make EMU figures work

ENTHUSIASTS of EMU are having a good time of it at the moment, with politicians providing daily evidence that they will move mountains to deliver the Holy Grail. The year had started off on a shaky note with German unemployment rising and doubts about Chancellor Helmut Kohl's future. But over the past months, those doubts have eased considerably and the political obstacles are being removed one by one.

The recent EU finance ministers meeting in Noordwijk in the Netherlands marked a key turning point. The comments of the German Finance Minister, Mr Theo Waigel, to journalists suggested that he was not quite "nailed to a cross" on the 3 per cent budget deficit target. While there have been subsequent denials, it is difficult to believe that EMU would be sacrificed because of a deficit overshoot in Germany equivalent to just 0.2 per cent or 0.3 per cent of GDP.

This meeting was quickly followed up by Chancellor Kohl's confirmation that he would be standing for election again in October 1998. This again is very significant, as the project would be seriously questioned if Dr Kohl left the stage.

However, there still remains the problem of Italy's participation. The Italian Prime Minister, Mr Romano Prodi, has been adamant that his country would satisfy the convergence criteria and would participate from the beginning. The various creative accounting techniques utilised by his government bear testament to this commitment. This Italian position has received support from the French who, for trade reasons, would like to see Italy and Spain on board from the beginning, regardless of how the Germans viewed the situation.

This week would appear to have seen some shift in this position. The allegedly politically influenced economic projections from the European Commission showed all member states except Sweden, Italy and Greece coming in with deficits at or below the magical 3 per cent level.

However, what is particularly significant is that Italy's deficit is projected to widen from 3.2 per cent this year to 3.9 per cent next year. This is a clear message to the Italians that the brave attempts made to date to rein in borrowing do not constitute sustainable convergence. The scene may now be being set to exclude Italy from the beginning, because there is a recognition that Germany would have grave difficulty swallowing the notion of a single currency containing the lira.

In looking at EMU prospects, the French election scheduled for March 1998 was always regarded as potentially problematic, given that it would coincide with the period when decisions on participants would he made. Consequently, Monday's decision by President Chirac to call a snap general election is important.

France will have to endure some tough fiscal medicine over the coming year to achieve a sustainable reduction in its budget deficit and this could have been difficult for the centre right government ahead of an election. Hence the gamble in calling an early election may he a positive one for EMU enthusiasts. Fighting an election when unemployment is at a record high is not an easy task, but it is possible that, if the government waited until next March, the unemployment situation could have been even worse.

Based on opinion polls a socialist victory appears unlikely at this stage but, even in the event of it happening. France's EMU aspirations would be unlikely to suffer very much. A centreright victory would clear the deck for Mr Chirac and leave the way open for whatever actions are required to get France into shape.

At last Monday's Forfas conference in Dublin Castle, the Minister for Finance, Mr Quinn, expressed the hope that companies were preparing for the euro. This is sound advice because, despite the many economic hurdles and imponderables facing the project, the political commitment is as strong as ever, as has been clearly illustrated over the past month. Mountains will be moved if necessary, to ensure that the euro is not still born.

Jim Power is chief economist at Bank of Ireland group treasury. The views expressed here are personal.