5 April Ecofin Informal

Date: 10/04/1997

FINANCE ministers gave their political approval to a series of legal texts which detail agreements on the conduct of policy in a monetary union reached at December's summit in Dublin. The texts translate into legal form the 'stability pact' for ensuring budgetary discipline in the euro-zone and the new Exchange Rate Mechanism (ERM) to bind the non-euro EU currencies to the euro. Each text will now be fully drafted and presented to the summit meeting in Amsterdam on 16-17 June.

THE first draft regulation makes clear that all EU member states should keep their budgets close to balance or in surplus. It establishes an 'early warning system' under which the European Commission and ministers will monitor member states' budgetary policy and seek out “significant divergences” from their stated medium-term objectives. If they find fiscal slippages, the Commission and ministers “shall address a recommendation to the member state concerned to take the necessary adjustment measures in order to prevent the occurrence of an 'excessive deficit'”. An excessive deficit is one worth more than 3&percent; of gross domestic product. The draft regulation will now be sent to the European Parliament for a second reading and should then be adopted by EU leaders at the June summit.

A SECOND regulation agreed by ministers aims to speed up and clarify the implementation of the 'excessive deficit procedure' set out in the Maastricht Treaty. This establishes deadlines for carrying out certain procedures and outlines the limited occasions when a country could be excused for having a deficit worth more than 3&percent; of GDP. Sanctions against a transgressor will have to be applied within nine months of an excessive deficit first being identified by the Commission. These sanctions will include a non-interest bearing deposit of a specified amount which will - “as a rule” - turn into a fine if the overshoot has not been corrected within two years. The German delegation argued that most references to “as a rule” should be removed from the text to ensure that punishments were all but automatic, but many were left in.

MINISTERS agreed that these sanctions should be exacted on a yearly basis and the maximum payment in any year should be 0.5&percent; of GDP. The first year's non-interest-bearing deposit would be at a fixed rate of 0.2&percent; of GDP plus a variable component equal to one-tenth of the difference between the deficit as a percentage of GDP and the 3&percent; reference value. In any following year, if the deficit had still not been corrected, the deposit would be equal to one-tenth of the difference between the deficit as a percentage of GDP and the 3&percent; reference value and again the maximum deposit would be 0.5&percent; of GDP. Ministers also agreed that “only 'virtuous' participating member states” should be allowed to benefit from the proceeds of the fines. This will be turned into a legal text in the coming weeks.

AGREEMENT was also reached on how to link member states inside the single currency with those outside. This proposal will again take the form of a resolution for Amsterdam and enshrines the main elements of the ERM II. The normal fluctuation bands for ERM II members will be plus or minus 15&percent; from a central rate against the euro, but member states will be able to ask for a narrower band. The decision to grant this would be taken on a case-by-case basis by the ministers of the euro-area, the European Central Bank and the minister and governor of the central bank of the 'out' state concerned.

ON THE basis of a note from the monetary committee, ministers agreed exactly how they will take the decision next year to launch the euro. The first stage will be the simultaneous publication at the end of March of reports by the Commission and the European Monetary Institute on the readiness of applicants to join the euro-bloc. “The reports must be based on reliable out-turn figures and should also include forecasts for 1998,” said Dutch Finance Minister Gerrit Zalm. The second step will be the formal opinion of the European Parliament and governments' consultation with national parliaments. After this, over the course of a weekend in late April or early May, ministers will make their recommendations to a summit which will take the final decision.

DURING lunch, ministers discussed how to keep tighter control over the EU's budget. From now on, finance ministers will formally discuss the budget at least twice a year. The first such debate will be held in January, before the Commission makes its annual proposal for spending. Then, in May, ministers will assess this proposal. They agreed that, “whenever possible, the EU should make use of redeployment once an unexpected rise in expenditure is unavoidable”. They also said annual budgets should be set “significantly below the present financial perspective, taking into account the inter-institutional arrangements ... with the European Parliament”.