Belgium’s ticket to EMU

Date: 19/03/1998

As the EU's longest-standing finance minister, Philippe Maystadt has presided over a steady reduction in Belgium's debt burden. Tim Jones meets a man who has played a key role in the emergence of European economic and monetary union WHEN a bunch of dark-suited men walks into York's Assembly Rooms this weekend for one of their six-monthly informal get-togethers, one of them will stand out.

He may not be up there with the finance ministers of Germany, France or Italy in terms of economic fire-power, but Philippe Maystadt more than makes up for that in experience and influence.

His ten-year tenure of Belgium's formerly loose purse-strings sometimes leaves the impression that he has always been there.

The 50-year-old Walloon Christian Democrat has already made it clear that come the Belgian general election next year, he will stand down as finance minister. This does not, however, mean he will disappear.

His name has been linked with a number of jobs: managing director of the International Monetary Fund, president of the European Bank for Reconstruction and Development (not being French eventually scuppered his chances) and, most recently, one of the six members of the new European Central Bank's directorate.

Sitting in the grand boardroom of his cabinet offices, Maystadt is enigmatic about his future plans and simply states his view that a couple of politicians on the ECB's board would be a good idea.

He is certainly not short of ideas when it comes to economic and monetary union; a concept he has long championed. The man who shared his 50th birthday with the Bundesbank is as dedicated to the goals of price and currency stability as the German central bank, largely because of what it has delivered to Belgium.

A political culture formerly marked by linguistic divisions, cronyism and the paying off of powerful interest groups caused the budget deficit to rise to 13% of gross domestic product in 1985 and the public debt to snowball to 135% of GDP by 1993.

"The weight of public debt has considerably reduced the room for manoeuvre of the Belgian authorities and that is why I have always said that, even if the Maastricht Treaty had never happened, we had by necessity to reduce the burden of debt progressively to find this room for manoeuvre," says Maystadt.

Since then, year after year of cut-backs and a rigid pegging of the Belgian franc to the deutschemark have produced a deficit of 2.1% of GDP and falling, inflation of 1.5% and low interest rates to match Germany's.

"This means that we are finally getting to the situation where we begin to have a choice: to increase certain spending or reduce the tax burden," he says. "Little by little, we are finding the room for manoeuvre of which we were deprived by the debt burden and the interest payments we had to make every year."

By raising taxes and freezing spending, Maystadt managed to create a large primary surplus - revenue outstripping expenditure once interest payments are disregarded - which slowly eroded the debt mountain.

Indeed, this year he was able to approve the release of 300 million ecu for health care and policing, which was found to be desperately wanting by a parliamentary inquiry into the recent infamous series of child murders.

This slow progress towards a sustainable debt stock should be reinforced once Belgium locks its currency to the euro in January together with up to ten other EU member states, given that interest rates will stay low.

"That is one of the advantages of the euro," says Maystadt. "I would be very happy if interest rates are low with the euro as it reflects confidence and because the euro is a currency in which you have all the ingredients for confidence: an independent central bank dedicated to the principle of stabilising prices and low inflation."

The desire of the ECB to establish its anti-inflation credentials with the financial markets and the 'stability pact' between euro-members, which guarantees budgetary discipline, should together ensure that the new currency is trusted at least as much as the mark, he adds.

"All these factors suggest that the euro will be an intrinsically stable currency and that interest rates will be relatively low, which is good for economic activity in the euro-zone."

Some commentators are convinced that the ECB will overreact once it becomes responsible for a common monetary policy in January. It will, they fear, raise interest rates to establish credibility with the markets. If Maystadt does happen to find a place on the bank's executive board, inflation 'hawks' need not worry.

"It is possible that, for a limited period, the ECB will react like this and it will be right," he insists. "The ECB will have very quickly to show its determination and will to fulfil the mandate given to it by the treaty, that is to say price stability. If that implies a rise in interest rates to prove that determination, then the ECB must do it. But I am convinced that in the medium-term, we will generally have low interest rates."

Predicting events during the opening days of the euro has turned into a cottage industry. Economic soothsayers are split between those who envisage a plus ça change, plus c'est la même chose scenario and those who foresee huge portfolio adjustments by international investors, a gold-rush into the euro and out of the US dollar, and a consequent surge in the euro's exchange rate on the currency markets.

"Nobody can be absolutely sure how things will develop," admits Maystadt. "Investors may want to wait and see whether the euro is a credible and stable currency before adjusting their portfolios, but we cannot rule out more violent and erratic capital movements. That is a key reason for accelerating the liberalisation of financial markets in Europe so we can offer the same kind of liquidity and depth found in the US financial markets."

Whatever happens, Maystadt, with many years' experience as chairman of the International Monetary Fund's interim committee, remains a fan of international financial and currency cooperation. He believes the advent of the euro provides an ideal opportunity to establish a fruitful "dialogue" with the Americans.

"We all have an interest in cooperation because the introduction of this new currency on to the international monetary system should be achieved without major ferment and without excessive fluctuations," he says.

Such talks would take place under the auspices of the Group of Seven (G7), the club of leading industrialised states formed in 1985, but with one obvious difference: the euro-zone itself would be represented. Maystadt has well-honed ideas on this question.

"The president of the ECB should always be there," he insists. "It would also be useful if the president of Ecofin participated equally in this dialogue," (in the same way that the US delegation includes both Federal Reserve Chairman Alan Greenspan and Treasury Secretary Robert Rubin). But Maystadt would like to go a little further; a little too far for some of his fellow finance ministers.

"I believe the Commissioner for economic and monetary affairs should also be involved because the European Commission can play a useful role. By its very nature, the Commission has a better view of the overall situation than the president of Ecofin, who could equally depend on the advice and recommendations of the Commission."

Several European ministers who take part in G7 meetings, including every British representative and Germany's Theo Waigel, are unenthusiastic about giving the Commission a seat at the table.

"In any case, for a certain period, we will see a G7-plus," says Maystadt. "I don't think the president of the ECB and Ecofin will go in place of the German, French or Italian ministers, but together with them. I can't picture a G3 in the foreseeable future."

Major interview with Philippe Maystadt, Belgium's Finance Minister.