Breakthrough for monetary union

Date: 18/12/1997

By Tim Jones

THIS was meant to be the year that economic and monetary union began, but instead it turned out to be the year that it became inevitable.

At the end of 1996, the European Commission - as well as reliable independent economic forecasters - were pointing to a depressing 12 months ahead. There would be growth but it would be slow. The plans of many governments to get their budget deficits under the EMU entry bar of 3% of gross domestic product looked under threat, and yet again the Asian 'tigers' would show Europe how to prosper.

Instead, economic growth exceeded expectations, particularly in Italy, which had been seen as a candidate for recession. Virtually every EU member state's deficit dipped below the 3% target and the Asians were shown to be paper tigers.

Even Italy is now poised to cause the Germans a headache by managing to shrink a deficit worth 6.7% of GDP last year to below 3% this year.

The political obstacles have also been cleared away.

The early legislative elections called by French President Jacques Chirac in the spring backfired and brought Lionel Jospin to the premiership in a Socialist-Communist alliance.

The left-wing government's early rhetoric made Bonn and Chirac shiver. Ministers warned against fetishising the 3% target, and claimed the trend of the deficit was more important than hitting 3.0% of GDP exactly.

Worse still, they called for new public spending to create 750,000 jobs.

Jospin and his all-powerful Finance Minister Dominique Strauss-Kahn never really changed their tune, but found a strong ally in the often-forgotten other side of the deficit-to-GDP equation.

Stronger than expected GDP growth, together with a scaling back of the jobs spending aims, meant that the deficit could be ratcheted back to 3.1% of GDP this year and 3.0% next.

Good enough.

Jospin also caused a fright in Germany with his pre-election pledge to renegotiate the hard-won 'stability pact' to ensure budgetary discipline once EMU was in place. The previous Conservative government had already tried to extract some of the pact's deflationary sting during the December 1996 Dublin summit, but Jospin wanted more.

Six months later, in Amsterdam, the French settled for warm words. Together with the legal texts embodying the accord, the summit agreed that employment was better than unemployment and that the pact should promote growth. Given that the Germans already believed this, it was hardly a monumental concession, but Jospin accepted it anyway.

The other new boy at the Amsterdam summit, UK Prime Minister Tony Blair, changed the tone of the single currency debate markedly in his first seven months in power. Replacing a government which wanted nothing to do with the euro, Blair's team made it plain that they desired total involvement short of membership on day one.

Fearful that the French plan for a special 'stability council' of euro-zone finance ministers would exclude the UK and could even change the EMU entry rules before a second wave of candidates could fill in their application forms, Blair began an intense round of secret diplomacy.

Firstly, he charmed German Chancellor Helmut Kohl into promising the UK a seat on the six-person executive board of the European Central Bank (ECB) the moment the country joined. Secondly, through a series of trade-offs involving the Airbus consortium and Eurofighter, glitzy summitry and a willingness to show off his French, he bounced Chirac and Jospin into backing the deal with Kohl.

Then, he almost pulled off a bilateral agreement with the French to let the UK sit in on meetings of the stability council - since renamed Ex or Euro-X - as long as he pledged to join the single currency later.

That his Finance Minister Gordon Brown did in a landmark speech to the UK parliament in October. Unfortunately, Kohl got cold feet over French attempts to formalise what was meant to be an informal arrangement, and vetoed it.

The Luxembourg summit was given the unenviable task of closing a deal.

Part of the European Voice 'Review of the Year'.