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EU: Europe Takes Big Step Towards Single Currency

  • Breffni O'Rourke

Prague, 25 March 1998 (RFE/RL) -- Western Europe has just taken a major step towards the introduction of its planned single currency, the euro. The European Union's Executive Commission today made public its formal recommendation that, as expected, 11 member states have met the qualifying criteria for Economic and Monetary Union (EMU). They can join the launch of the common currency next January.

The Commission's recommendation must be approved at a summit of all EU states in Brussels in early May, but that is widely considered only a formality. The 11 countries declared eligible in the recommendation are Germany, France, Italy, Belgium, Netherlands, Luxembourg, Ireland, Portugal, Spain, Austria and Finland. Greece was excluded because it could not met the qualification criteria, and the remaining three EU members -- Britain, Denmark and Sweden -- have decided not to join monetary union for the present.

The Commission report, although it held no surprises, marks a milestone on the EU's often controversial path towards monetary union. And that union, according to a commentary in the U.S. newspaper the Wall Street Journal Europe (March 25), may be the most important event to occur in the international monetary system since the dollar became the world's dominant currency in World War One.

When the euro is adopted, it will complement the European single market and revolutionize the way Europe does business, as well as creating a new currency of global standing. But introducing a single currency across 11 basically-independent countries whose economies are still at different levels of development is a project never before attempted. Critics say the exact results are hard to predict, and that confusion and price instability may result. And they also say some qualifying countries have probably resorted to "constructive accounting" to meet the main EMU qualification, namely that budget deficits must not exceed three per cent of gross domestic product (GDP).

One of the key points in the Commission's recommendation is the inclusion of Italy on the list of the 11 starters. For the past year there has been much debate and speculation about whether Italy was economically fit to join. But the government of Prime Minister Romano Prodi has worked to bring its budget deficit within the set limit. Now, according to official figures, it stands at 2.7 percent of GDP. Some analysts question whether that performance can be sustained in the future.

But one German analyst, Jens Dallmeyer of the Deutsche Morgan Grenfell investment house in Frankfurt, notes that in any case monetary union is a highly political move, designed to further European integration. He says that if EU founder-member Italy had been left out of the first wave of monetary union, the shock to European unity would have been greater than the risk of having it in EMU. He says Italy has made major improvements in consolidation of its public debt, and has fulfilled the monetary criteria on interest rates, inflation and exchange rates.

Dallmeyer also said that Italy's debt, at nearly 122 percent of GDP, is double the level set as acceptable in the EMU criteria for candidates. The EU convergence criteria call for the government debt ratio of participating countries not to exceed 60 percent of GDP. However, candidates may exceed that limit, as long as they make progress towards the desired target.

Another important report was issued today by the European Monetary Institute, which under EMU is to evolve into the European Central Bank. The Frankfurt-based institute said there had been good progress towards economic convergence in the EU since it issued its last report nearly 18 months ago. But it also said more needs to be done.