2 December Ecofin

Date: 05/12/1996

FINANCE ministers failed to agree the final details of a stability pact to ensure budgetary discipline in a monetary union, denting hopes of finalising the deal in time for the Dublin summit on 13-14 December. Their failure means that another meeting will be held in Dublin the day before the summit begins. Ministers have agreed that budget deficits within the euro-zone should never exceed 3&percent; of gross domestic product unless this is caused by “temporary” and “exceptional” factors. However, ministers could not settle their dispute over how to define exceptional and temporary. German Finance Minister Theo Waigel, who arrived for the meeting in the early evening, wants to specify the depth of recession which justifies missing the 3&percent; target in detailed figures. Most others want as much flexibility as possible in making a decision, but they did reach a political deal on fining countries which miss their targets.

MINISTERS considered a detailed report from the monetary committee into progress on preparations for EMU. They agreed the framework plan for creating a new Exchange Rate Mechanism (ERM II) for member states outside the euro-bloc. It will have trading bands of 15&percent; either side of a central rate against the euro, and outside currencies will not be linked to each other. Ministers also approved the preparations for giving the euro a legal status. They agreed to the use of the European Commission's powers under Article 235 of the Maastricht Treaty to introduce legislation to ensure continuity of contracts, the replacement of the ecu by the euro on a one-for-one basis and rules for the conversion of currencies and rounding. The technical working party was asked to present another report to the Dublin summit on establishing the legal basis of the euro once EMU is under way.

ECOFIN, together with its counterpart responsible for social affairs, adopted a report for Dublin on the EU labour market. The paper calls on industry to modernise production methods so that it can compete on quality as well as price, and on governments to emphasise the key importance of a highly-educated workforce.

A LONG-awaited decision on how to guarantee European Investment Bank lending to third countries has still not been made. The Commission has proposed a renewal of the EIB's lending mandates to central and eastern Europe, countries bordering the Mediterranean, South Africa, Latin America and Asia. But ministers continued to argue over the exact percentage of the Union's guarantee for EIB lending and the size of the individual mandates to these regions.

FINANCE ministers agreed to extend their existing value added tax regime for another two years. They agreed that the standard minimum tax rate should stay at 15&percent; until the end of 1998, but rejected attempts to set a legally-binding ceiling of 25&percent;. To pacify the Commission, they did agree that the maximum VAT a country could charge should not be more than 10&percent; above the minimum rate and said they would endeavour to maintain or reduce this differential. The special duty allowances for Denmark and Finland will be phased out. Travellers' allowances for alcohol and tobacco will disappear at the end of 2003 in both countries. Sweden would not accept the principle that these allowances should be phased out, but did agree to review its position together with the Commission in June 2000.

THE Commission's work in improving internal auditing and management of the Union's resources (the SEM2000 initiative) was welcomed by the ministers. The report by Budget Commissioner Erkki Liikanen will now go to the Dublin summit.