From blank sheet to blueprint

Date: 21/12/1995

By Tim Jones

THIS was the year the EU faced up to the reality of what having a single currency would really mean.

In January, politicians were still talking about introducing the Ecu throughout the Union as early as 1997. But by the time they left last weekend's Madrid summit, they had signed up to a plan to form a monetary union among a minority of member states from 1 January 1999.

Apart from that, the Ecu was no more. This currency basket, used as a unit of account in the EU since 1979, had been destined to assume the role of the European currency. But it was deemed by the Germans to have devalued too many times over the years to be a credible replacement for their “beautiful” deutschemark.

As a result, the summit bowed to German pressure and agreed to the meaningless “Euro”, shunning traditional names such as the florin, shilling or crown.

By the end of the year, the short list of countries with an appointment with the Euro was taking shape. Top monetary officials began to talk openly about a list which obviously included Germany, but also its monetary satellites - Austria and the Netherlands - which could feasibly form a currency union today with little disruption.

Belgium, after years of fiscal retrenchment, looks on course to bring its budget deficit down to the Maastricht Treaty's target level of 3&percent; of gross domestic product in 1996, a year before the final assessment is made of who can join the Euro club.

With inflation among the lowest in the EU, at 1.5&percent;, and with its economy closely tied to those of Luxembourg and the Netherlands, Belgium seems a prime candidate for the Euro until you look at its public debt - standing at more than 130&percent; of GDP, well above the Maastricht target of 60&percent;.

Nevertheless, German and Dutch officials have all but guaranteed that Belgium must join, and the flexibility offered by the treaty when it talks of reducing debt to 60&percent; “at a satisfactory pace” makes this possible.

The big questionmark hangs over France. German Chancellor Helmut Kohl has made it clear time and again that a monetary union without the French is unthinkable. For him, a currency union between France and Germany is a guarantee against war in Europe.

Yet 1995 was the big test of this special relationship. France's Kohl-given right to be in a currency union with Germany was challenged by a general transport strike against the austerity measures required for France to qualify for membership.

Jacques Chirac had made the mistake of fighting and winning the May presidential elections largely on a promise to wage war on unemployment when, in reality, he would be forced to slash social security spending in pursuit of the magic 3&percent; deficit target.

Even in the most optimistic scenario, the highly ambitious “Plan Juppé” will just manage to get the deficit to 2.9&percent; in 1997. There is no room for slippage and Chirac knows it.

Reality bit everywhere. In the years following the signing of the Maastricht Treaty in December 1991, monetary union advocates concentrated on theory to present their case.

Yes, someone getting in a car with 100 ecu in France and driving to every member state of the Union without spending any of it would lose 40 ecu simply through changing it into national currency.

Yes, studies from the European Commission found elimination of these transaction costs and of the “wasteful” allocation of company resources into treasury management could boost Union growth by up to 0.4&percent;.

The treaty offered them a sketched-out map showing a rough route towards the single currency goal: it had to be created by 1999, based on countries' price and budgetary performance in the preceding years.

What member states needed, and what they gave themselves at the Madrid summit, was a detailed line-by-line scenario setting out how the European currency would be created.

When would the short list of Euro-bloc countries be drawn up? How long would it take to mint and print the billions of coins and banknotes needed? Should banks swap their business into Euros from 1 January 1999, even if the new currency still had no legal-tender status? How soon should countries swap over their national debt into Euros? These questions still had not been answered ahead of the Madrid summit.

But compared with previous efforts of a similar scale, the speed with which this scenario was drawn up and agreed was extraordinary. Just nine months lapsed between the publication of the Commission's Green Paper on the change-over scenario and the final decision at Madrid.

At the summit, EU leaders agreed that the short list would be worked out “as early as possible” in 1998, based on economic performance in 1996-97, banknotes and coins would be introduced by July 2002 at the latest and new issues of national debt would be swapped into Euros from Day One.

This last point was a set-back for the Germans who had argued that this decision should be left open to member states. Germany's reluctance to agree to set timetables for converting monetary transactions into Euros right from the start gave rise to fears, particularly in Paris, that it was using the three-year transition period simply to dip its giant toe into the single currency water.

The heating-up of the debate over the loss of the deutschemark in Germany gave credence to this scepticism.

Keen to find an issue that could unite his party, Social Democrat leader Rudolf Scharping identified the defence of the mark. His lieutenant Oskar Lafontaine later rebelled and replaced him as party leader, threatening to fight the 1998 elections on a pro-deutschemark ticket.

The ruling coalition managed to spike the SPD's guns to an extent by out-defending them on the mark. In a widely-reported closed-door meeting at the Bundestag, German Finance Minister Theo Waigel made it clear that countries which failed to reduce their budget deficits sufficiently would not be let into the Euro-bloc by the back door.

In November, he came up with a plan for a Stability Pact to ensure that Euro-bloc members kept their budgets under control. The 3&percent; deficit target would be turned into a maximum and consistent failure to stay under it would be met with an on-the-spot fine.

This plan, which has to be finalised by the European Commission in 1996, should be enough to appease German fears, Waigel believes.

“People should not be scared,” he said at the Madrid summit. “We have ensured that the common European currency will be as stable as the deutschemark.”

With the transition issue closed, attention will turn to what happens next. How will the Euro-bloc stop other EU currencies devaluing against it and winning competitive advantage? How will the Waigel rules be written into EU-friendly terms?

What is clear is that the coming 25 months are now mapped out. A handful of EU countries know exactly what they must do if they are to meet their date with the Euro in January 1998. Watch France and Belgium.