Forecasts put ten on course to join EMU

Date: 24/10/1996

By Tim Jones

A COCKTAIL of accelerating growth and ambitious budget-cutting programmes should ensure that most member states are ready to sign up to a single European currency in 1999, according to unpublished European Commission forecasts.

When he unveils his latest predictions for EU economies on 6 November, Economics Commissioner Yves-Thibault de Silguy will hold out the hope that at least ten countries - and possibly as many as 14 - will meet the entry requirements for the euro zone.

As an antidote to recent remarks from French politicians and German central bankers opposing early membership for Mediterranean countries, De Silguy will use the upbeat figures to galvanise Italy and Spain in particular into further budgetary efforts.

Officials confirm that the new forecasts paint a rosy picture compared with the Commission's last report in May. They indicate the EU's overall gross domestic product will grow faster in 1996 than the 1.5&percent; spring forecast, although growth next year is unlikely to change from the 2.4&percent; already predicted.

The motor behind the improvement in the Union's economic fortunes will be Germany, where GDP has grown faster than May's worst-case scenario of just 0.5&percent; this year and 1.8&percent; next.

Instead, Commission economists are now forecasting that German growth will be more than 1&percent; this year and above 2&percent; in 1997.

The May figures were compiled in the wake of a serious slow-down in Germany and France in the early months of the year, during which the German economy shrank by 0.5&percent; in the first quarter alone.

Now, six months later, the situation is very different. Stronger export performance and the impact of higher pension payments translated into second-quarter German growth of 1.5&percent; - an improvement of nearly 4&percent; over 12 months.

These growth prospects, combined with tough budgetary measures, will ensure that the Commission sticks to its May forecast that the 1997 German budget deficit will dip below 3&percent; of GDP - in line with the entry rules for the euro.

Even though the Commission was alone in May in also predicting that the French deficit would - conveniently - fall below 3&percent; in 1997, nothing has since persuaded it to change its optimistic outlook.

However, officials admit this scenario will depend on EU statisticians allowing Paris to use a 6-billion-ecu payment from France Télécom as compensation for its pension liabilities to reduce the government's 1997 deficit.

Alongside these two key players in the euro zone, the Commission will predict that at least eight more member states - the Netherlands, Belgium, Denmark, Luxembourg, Ireland, Austria, Finland and Sweden - are on course to meet the 3&percent; target for 1997.

With a little extra pain, Spain, Portugal and the UK could also obtain the budgetary green light.

Commission officials are still running through the details of the Italian government's austerity programme, which aims to slash 33 billion ecu from next year's budget, before they decide whether to cut Italy's deficit forecast of 5.2&percent; for 1997.

Less contentious is the Commission's view that EU economies are experiencing a 'convergence' of their inflation performance, with the average rate likely to dip to historically low levels of under 2.4&percent; next year.

“Governments have growing credibility in the markets,” said an official. “They are making serious efforts in the budgetary field and convergence is much better on both budgets and prices.”

This credibility can be seen in the lower long-term rates of interest governments are having to pay investors to hold on to their debt. Since the May forecasts, French ten-year interest rates have dipped below those in Germany while even Italian yields have dropped two percentage points since the beginning of the year.