Call for tougher action on convergence

Date: 23/11/1995

EU governments will have to pull out all the budgetary stops if they are to make the progress needed to take their countries into a single currency bloc as early as 1999.

These are the conclusions of the six-monthly economic forecasts from the European Commission and a “convergence report” from the European Monetary Institute, both published yesterday (22 November).

As befits their temperament, the central bankers of the EMI were the more pessimistic. “Most member states must significantly improve their performance and, at present, there does not exist a majority of member states which satisfy all the criteria,” said the EMI report.

Economics Commissioner Yves-Thibault de Silguy made the same noises, but was generally more upbeat as he presented his services' macro-economic forecasts for 1995-97. “Convergence will progress further in 1996 and 1997,” he said, claiming that even if policies remain unchanged, 11 countries will satisfy the Maastricht Treaty's criteria for keeping inflation under control and ten will meet the target for long-term interest rates in time to meet the 1999 deadline.

The forecasts suggest that with unchanged policies, the average EU budget deficit will fall to 3.1&percent; of gross domestic product in 1997 from 4.7&percent; this year. Eight countries will have got their budget deficits below the Maastricht target of 3&percent; of gross domestic product in time for a summit decision whether to go ahead with a monetary union in late 1997.

Controversially, this includes France which, according to the Commission, will cut its deficit to 2.9&percent; of GDP by 1997. Given that the financial markets have long been sceptical about the budget-cutting plans of Alain Juppé's government, de Silguy felt obliged to defend the Commission's optimistic forecast.

He said it had been based on the government's 1996 budget, which promised to cut the deficit from 49 billion ecu this year to 44 billion ecu or 3.55&percent; of GDP in 1996, but also on last week's plans to bring the social security deficit to balance by 1997. “These are serious measures,” said de Silguy.

Belgium would, on the other hand, see its deficit rising to 3.5&percent; of GDP in 1997 from 3.1&percent; next year with no extra budget-chopping measures. But de Silguy expects extra action to be taken. “I'm not at all worried about Belgium's ability to come within the 3&percent; target,” he said.

Not only will these policies ensure the formation of a single currency bloc in accordance with the Maastricht timetable, but they will also help address the EU's low growth and unemployment problems, de Silguy stressed.

Economic growth in 1995 will be 2.7&percent; in the EU rather than the 3.1&percent; predicted back in May. The Commisssioner said this was because the weakness of the US dollar hit European exporters, while the turbulence on the currency and bond markets led to a rise in interest rates for those countries which had failed to get their budgets under control.