Euro survives pre-natal political storms

Date: 17/12/1998

By Tim Jones

THE year began with the real prospect of a ten-member monetary union opening for business in a world laid low by Asian flu and ended with a precocious interest rate cut from the new European Central Bank.

With 20/20 hindsight, the relatively benign gestation of economic and monetary union during 1998 had an air of inevitability about it.

In fact, without former German Chancellor Helmut Kohl and his unstoppable desire to make history, the whole project could easily have stumbled badly. It took until Christmas week 1997 for former Italian Premier Romano Prodi to push through parliament the tax hikes and spending cutbacks worth 13 billion ecu which were his entry ticket to euro-land.

Even then, the Italian story was not over. Dutch Finance Minister Gerrit Zalm started to kick up a fuss about Italy's huge overhang of residui passivi. These credits, which had been committed by parliament to public enterprises but frozen by the treasury, threatened to swell Rome's budget deficit once Italy joined EMU.

But Zalm failed to win over his German colleague Theo Waigel and the game was lost. Waigel was happy that his growth and stability pact would keep Italy on the straight and narrow.

When the Commission produced its report on the readiness of member states for EMU in March, it was no surprise when it picked 11.

Glitches such as the Irish punt's excessive strength and the lira's failure to be in the Exchange Rate Mechanism for the requisite two years before joining EMU were steamrollered. The Commission reinterpreted the Maastricht Treaty on the hoof.

Within days, the German government and the Bundesbank had given their support to the Commission's choice of members.

Deprived of a scrap over membership, the politicians then turned to a technocratic dispute over who should be the first president of the ECB. Eventually the Dutch chief of the European Monetary Institute Wim Duisenberg got the job but not before a row between the Dutch, Germans and French.

When Germany's Social Democrats came to power in the autumn, Finance Minister Oskar Lafontaine called repeatedly for lower interest rates, but all he did was put off a rate cut until December. Central bankers, like small children, hate being told what to do.

Feature forms part of the European Voice 'Review of the Year'.