MANAGING EMU

 

Today's meeting of EU finance ministers in Dublin Castle will have a crucial bearing on the Irish presidency. If the ministers can agree final details of the rules which will apply in monetary union, the Government will have succeeded in brokering agreement on all the key elements of the move to a single currency. However, agreement on the issue is by no means guaranteed with many of the other EU members unwilling to agree to the tight rules which Germany is demanding.

Substantial progress has already been made. EU finance ministers have struck a deal on two important issues; a new exchange rate mechanism for currencies who do not join monetary union and on the key legal issues surrounding the introduction of the new single currency, the euro. However the so called stability pact - the rules which will apply after the euro is introduced - remains to be decided. Germany is insisting on tough rules to ensure that once states join monetary union they will maintain budgetary discipline. It wants automatic penalties for countries with excessive budget deficits, while France wants political" involvement in the imposition of any sanctions.

Broad agreement on the pact is now said to be close. The EU Commission president, Mr Jacques Santer, said yesterday that agreement on the issue was within reach although there is, as yet, no public sign that the German finance minister, Mr Theo Waigel, is ready to compromise.

The case for laying down rules for states joining monetary union is clear cut. There is little point in demanding that all member states must get their budgets in order so as to qualify for monetary union - and then abandoning all financial restraint once the single currency is introduced.

The German perspective on this issue is easy to understand, given the still vivid memory of a more troubled period earlier this century when the German people had to "take a wheelbarrow full of money to buy a loaf of bread", as the Taoiseach, Mr Bruton, observed this week.

That said, the case for the kind of flexibility demanded by France and the majority of EU states is not unreasonable. Public support for monetary union could be undermined unless it is clear that major financial decisions will continue to be made by democratically elected politicians. As President Chirac of France has noted, a democratic counterbalance has to be found to the European central bank, "just as the Bundesbank has a balancing element in the form of the German Government". The challenge facing the Union is to strike the right balance between the economic rigour needed for monetary union and the political task of building popular support for the whole project.

It can be expected that the financial markets will be watching the outcome of today's meeting of finance ministers and the weekend summit with a keen eye. It is to be hoped that the importance of what is at stake will be appreciated by all participants. An agreement on the stability pact would help to maintain the momentum towards monetary union. But continued disagreement between Germany and her partners would raise renewed doubts about the agreed timetable for EMU.