Kohl talks tough on ‘stability pact’ goals

Date: 19/09/1996

By Tim Jones

GERMAN Chancellor Helmut Kohl is putting EU governments under intense pressure to clinch a deal on a watertight pact to enforce budgetary discipline in a single currency zone.

He has taken the unusual step of writing personally to EU leaders ahead of this weekend's crucial informal meeting of finance ministers in Dublin to stress the need for an “effective” pact to show that governments are committed to “forward-looking and permanent stability”.

In the letter, Kohl warns his EU counterparts that “agreement on an effective stability pact is of central importance so that we can achieve the historic goal of monetary union”.

The move comes amid speculation in the press and the financial markets that Kohl would be prepared to relax the monetary union's strict entry rules so that France could join on time.

Only this week, his Foreign Minister Klaus Kinkel felt the need to issue a tough statement denouncing such talk as “totally baseless”.

Nevertheless, rumours persist that the French government's strenuous efforts to reduce its budget deficit to 3&percent; of Gross Domestic Product (GDP) in 1997 - in line with the Maastricht Treaty's rules - will have to be rewarded by a ticket into the Euro-zone even if it misses the target.

Bonn believes this kind of talk to be a threat to the credibility of the Euro, prompting Kohl to intervene.

“I believe it is vital, particularly at this time, that we demonstrate to our citizens that we are committed to forward-looking and permanent stability,” says the chancellor's letter.

“This will enhance acceptance of the Euro among the public and send a positive signal to the financial markets.”

For this reason, Kohl calls on all governments to complete the work on designing a budgetary stability pact in time for the Dublin summit on 13-14 December.

In the run-up to this weekend's meeting of finance ministers, German monetary officials have used the Kohl letter as a way of convincing other member states that Bonn is serious about having a binding pact with real punitive powers - and soon.

“This is the most important item on the agenda for Dublin,” said a senior German official. “In the face of sizeable budget deficits, we have to make clear that stability is the most important ingredient of EMU.”

At a meeting of the EU's secretive monetary committee last week, several member states were sceptical about Germany's proposal for a compressed six-month timetable for vetting budgetary indiscipline.

Failure to put in place measures aimed at bringing the deficit back below 3&percent; of GDP within six months would be punished with a cash sanction in the form of a non-interest-bearing deposit. This could turn into a fine after two years if the deficit had still not been corrected.

The Netherlands, Italy and Denmark feel it would be impossible for any government to win parliamentary backing for a mini-budget within that time-frame. They are seeking a 12-month deadline, while the European Commission is pushing for nine months.

German negotiators are determined to keep the deadline to six months, but might consider extending it in cases where a member state's parliamentary procedures were exceptionally cumbersome.

They also disagree with the Commission's proposal to set a maximum for the deposit/fine of 0.5&percent; of GDP and its unwillingness to define exactly how deep a recession should be in order for a member state which overshot its deficit target to be excused.

Bonn wants the stability pact to specify that exceptions should only be made for countries which go into recession over four consecutive quarters, resulting in 2&percent; negative growth over the year.

Kohl makes it clear in his letter that his government's views have not changed. “The consequences of exceeding the upper limit on public deficits must be clear and quantifiable for all member states.”