Bid to exclude Italy from EMU

Date: 10/04/1997

By David Thomas and Tim Jones

CENTRAL bankers from key northern European member states are pressing for a high-level political deal by the end of the year to keep Italy out of the first wave of countries to form a monetary union in January 1999.

As the chances of creating a euro-zone have firmed up in the past few weeks, so has the pressure from central bankers in the so-called monetary 'core' - Germany, France, the Netherlands, Austria and Belgium - to keep the euro's founding group watertight against speculative attack in the financial markets.

Several top monetary officials believe an agreement should and will be reached between the Italian government and members of the 'core' within the coming six months, which will attempt to save Rome's political face. This will be vital for one of the six founders of the European Communities.

Such an agreement would ensure Italy fully accepts its exclusion from the first wave of euro-zone members, but would virtually assure the country of membership by a predetermined date.

This could be achieved by a political declaration that the 'convergence' of the country's economic performance, particularly that of its budgetary policy, would be 'reassessed' within two years of the beginning of the economic and monetary union (EMU). The founder members would also give their honest opinion of a revised convergence programme from the Italian government.

In this way, leaders could commit themselves to granting automatic EMU entry for Italy as soon as the country met its pre-set convergence aims, while the Italian government could bank on early access by a specified date before euro notes and coins hit the streets in 2002.

Ironically, it was the latest mini-budget from the government of Prime Minister Romano Prodi - aimed at slicing an extra 8 billion ecu off the 1997 deficit and reducing it to the EMU entry target of 3&percent; of gross domestic product - which convinced several central bankers that Italy should not be allowed in.

The Prodi government achieved most of its savings by bringing forward previously agreed tax increases so that they fell into this budget year - the key fiscal year upon which EMU entry will be based.

“This was a budget designed with nothing else but Maastricht in mind,” said one senior official. “In no way does it satisfy any concept of sustainable convergence.”

When the staff of Economics Commissioner Yves-Thibault de Silguy publish their forecasts for the Italian economy on 23 April, some officials hope they will paint an accurate picture of the results of Prodi's mini-budget.

This would be likely to show a deficit at 3&percent; of GDP for this year and as much as 4&percent; next year, claim economists.

In an effort to stave off this kind of budgetary behaviour, finance ministers and central bankers agreed last weekend in Noordwijk to take the decision on launching EMU as late as early May next year. This will allow the Commission and the European Monetary Institute to look at government finances for 1998 as well as for this year.

A first wave of member states without Italy would make membership for Spain and Portugal “politically and strategically impossible”, according to a leading northern central banker.

This is despite the fact that both countries have a much better chance of qualifying for first-wave membership on the basis of their budgetary numbers.

At the root of the 'core' members' worries is the growing belief that the first wave of membership must work and cannot allow itself to be unpicked by sceptical financial markets. The period between May and December next year will be difficult enough, they say.