11 November Ecofin

Date: 14/11/1996

EU FINANCE ministers formally decided not to begin economic and monetary union from January 1997. Under the terms of the Maastricht Treaty, ministers had to record this decision even though they have acknowledged for more than a year that the timetable would be impossible. A 'report on convergence' pres-ented to ministers by the European Commission found only four countries - Denmark, Ireland, Luxembourg and the Netherlands - had satisfied the criteria needed to allow them into a single currency bloc. The treaty specified that, for the 1997 start date, a majority of states had to be ready and willing. Using Article 109j of the treaty, ministers agreed to recommend to their heads of government that EMU should be delayed.

MINISTERS went into a restricted session to discuss their preparations for the summit in Dublin on 13-14 December. They began by discussing a paper prepared by the monetary committee on a framework for creating a revamped Exchange Rate Mechanism (ERM) for member states left outside a single currency zone. The system will have broad trading bands either side of a central rate against the euro, and outside currencies will not be linked to each other. Most member states accepted the plan, although the idea that outsiders should not be linked to each other continued to spark debate. Jürgen Stark, deputising for absent German Finance Minister Theo Waigel, made it clear that his government was unwilling to reach a deal on the ERM II, or on the legal status of the euro, without a parallel agreement on how to enforce budgetary discipline in the euro-zone - the so-called 'stability pact'. Finance ministers called on the monetary committee to finalise its ERM II proposal in time for the next ministerial session on 2 December.

STARK stuck fast to his government's view that a 'stability pact' lacking a numerical definition of a deep recession was unacceptable. Ministers discussed the parts of the pact which they could agree: that budget deficits within the euro-zone should never exceed 3&percent; of gross domestic product unless such an overshoot was “temporary” and “exceptional”, and that persistent failure should be met with cash penalties. However, Stark insisted that the pact should include a definition of both “exceptional” and “temporary” conditions, which should be negative growth of 2&percent; in one year measured over four consecutive quarters. Most other member states opposed this as too strict and unworkable a definition. The Dutch delegation came up with a compromise proposal, which would not include a numerical definition but would make it clear the recession had to be large.

THE question of how to define a strict legal status for the euro appears to be close to an answer. In their conclusions, finance ministers welcomed the “substantial progress” made in overcoming obstacles to the use of Article 235 of the treaty. This will be used as the legal base for three urgent questions which cannot wait until the first countries to join the euro-bloc are chosen in early 1998. These are: the name of the currency; a pledge that currencies in existing contracts should be converted into euros at the exchange rates decided by finance ministers when monetary union begins on 1 January 1999; and a one-for-one conversion of the ecu into the euro. The article allows the EU institutions to take action “if it should prove necessary to meet the objectives of the treaty”. Danish officials made it clear that they no longer had a legal problem with the use of Article 235.

MINISTERS took note of a report from Internal Market Commissioner Mario Monti on the development of taxation systems in the EU. They called for further work and welcomed the creation of a regular fiscal policy group, where the Commission could keep member states' representatives informed of tax issues and all the different strands of harmonisation policy.

THE Commission's proposal to set up a fund to guarantee loans for job-creating investment made by small and medium-sized enterprises (known as ELISE) could not be agreed by ministers. The plan from Economics Commissioner Yves-Thibault de Silguy is part of the Commission's confidence pact for employment.