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Europe: European Union Seeking New 'Budget Stability Pact'

  • Joel Blocker

Prague, 2 December 1996 (RFE/RL) - In Brussels today, European Union finance ministers are meeting to try to break a long-standing deadlock over conditions for joining the EU's scheduled Economic Monetary Union (EMU) and new single currency, the "Euro." Both are due to be introduced in 25 months' time.

Officials and analysts alike expected hard bargaining among the ministers, but they did not expect any accord over the difficult central issue: what kind of budgetary discipline to enforce on those countries eligible to join the EMU. Rather, they suggested, the dispute would be passed on to the EU's summit meeting late next week in Dublin. Some even predicted it might not be resolved before the middle of next year, if then.

The issue is complicated economically, but is simple and important in its implications. Without an agreement on a proposed "budget stability pact" for EMU joiners from the EU's current 15 member states, the successful, on-time introduction of the Euro would be threatened. That, in turn, would delay the start of planned negotiations for the granting of full membership to the 10 Central and Eastern European nations already closely associated with the EU: Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.

The EU's oft-repeated promises to begin those talks some time after the middle of next year are already clouded by the failure so far to achieve any consensus on major internal structural reforms at its current Inter-Governmental Conference. EU expansion to the East cannot begin until both processes are completed. If internal reforms remain stymied and the EMU's introduction is perceived as faulty or even as a failure, the effect could set back by years the EU's target date for the admission of the first eligible Eastern nations -- now seen as 2002 at the earliest.

All EU states have agreed in principle to the idea of a stability pact that would enforce budgetary discipline among members joining the single currency. They all agree, as well, on a provision for hefty fines against any EMU member that allows its budget deficit to run out of control, which would endanger the stability of the Euro zone. But they are stalemated over how rigid or flexible the system should be in practice.

Germany, with the EU's largest economy, wants fines to be imposed automatically as soon as an EMU member either borrows excessively or allows its national deficit to rise beyond three percent of its gross national product. That's the benchmark for monetary discipline established by the Maastricht Treaty which laid down the time-table for creating a single currency. The Netherlands agrees with Germany, and both countries want a text that would allow a faulty nation to escape sanctions only in the event of a deep recession (defined precisely as a growth contraction of more than two percent over a year.)

The rest of the EU, together with its Executive Commission, wants a more flexible system, which would allow countries to escape fines in less severe recessions at the discretion of the Union' ministers. Most of them say they fear that applying fines during a recession would simply make the economic down-turn more extreme. Many EU members have been in recession for much of the 1990s.

For Germany, a rigid stability pact is crucial to assuring its increasingly skeptical public that the Euro will be as solidly based, and thus as strong, as the German mark. Recent polls show that only one in five Germans now favors a single currency as soon as 1999.

When the Maastricht Treaty was negotiated in 1991, it was Germany that insisted on tough criteria to ensure that nations seeking to join EMU should have, among other things, low deficits and inflation rates. For years, that seemed to mean that only an "inner core" of some six or seven nations -- Austria, Belgium, France, Germany, the Netherlands, Luxembourg and perhaps Ireland -- would make the grade.

But early this month the picture changed drastically when the Commission issued an optimistic report suggesting that no fewer than 12 members --Britain, Italy and Greece were the exceptions -- might meet the Maastricht criteria. That forecast struck analysts -- and German officials -- as vastly over-optimistic, the result of "creative" national accounting that allowed members to juggle their national budget estimates almost at will. That's why the Germans are now so adamant about a rigorous stability pact.

That's one big reason, too, why Chancellor Helmut Kohl is meeting with French President Jacques Chirac no less than three times during the two weeks before the Dublin summit. The leaders of the EU's traditional bilateral "motor" are hoping to find a suitable compromise for the stability pact impasse. They are also seeking to unlock the so-far unproductive Inter-Governmental Conference with a set of Franco-German proposals for internal reform. On the success of both initiatives hangs in no small measure the fate of Eastern candidacies to the EU.