Dutch join EMU qualifiers

Date: 31/10/1996

By Tim Jones

FOUR member states are poised to satisfy the entry rules to the European single currency bloc a year early, according to a report soon to be adopted by the European Commission.

The annual 'convergence report', due to be published separately from the Commission's new economic forecasts on 6 November, says that the Dutch government's budget deficit should dip below 3&percent; of gross domestic product this year.

With low inflation and long-term interest rates, a rock-solid currency and a slowly eroding stock of public-sector debt, the Netherlands should join Denmark, Ireland and Luxembourg in the list of countries meeting the tough entry conditions for monetary union.

The 78-page report from the services of Economics Commissioner Yves-Thibault de Silguy makes positive reading for those advocating the creation of a single currency in January 1999.

In contrast to the scepticism that will greet the autumn forecasts, the report's findings will be seen as a reliable gauge of member states' progress in 'converging' their economies because they focus on past achievements and current performance instead of crystal-gazing.

“Substantial progress towards the achievement of a high degree of sustainable convergence has been made in all member states,” the report concludes, pointing to even “greater momentum” during 1996.

Apart from the four countries already meeting the Maastricht Treaty's criteria, many others are running a close second. The report says that only Germany will widen its budget deficit this year, from 3.5&percent; in 1995.

“Despite the unfavourable economic climate, almost all member states are expected to make further progress in reducing government deficits in 1996,” it says.

Particularly large deficit reductions of more than 1&percent; of GDP will be experienced in Greece, Spain, Austria, Finland, Sweden and the UK as well as the Netherlands.

However, the paper reveals that the Spanish deficit for 1995 has been revised upwards from the 6.2&percent; of GDP forecast in the Commission's May figures to 6.6&percent;.

Spain's overshoot raises the threat that the country could have the special regional aid it receives from the EU suspended under cohesion fund rules, although a decision on this has been delayed by the Commission.

Although it is generally accepted that the 3&percent; budget deficit target is the key single currency criterion, governments are also meant to reduce the debt they have built up over the years towards 60&percent; of GDP as quickly as they can.

But slow growth and the need to finance persistent deficits mean that the EU's debt-to-GDP ratio will continue to rise from last year's 71.2&percent; average.

By the end of this year, only France, the UK and Luxembourg will have debt ratios below 60&percent;, with Germany and Finland between 60 and 70&percent; and six others under 80&percent;.

More importantly, eight member states - Belgium, Denmark, Ireland, Greece, Italy, the Netherlands, Portugal and Sweden - are likely to reverse the upward trend of their debt-to-GDP ratios this year.

Progress in dampening down inflation has been more significant. “The steady progress made in the EU as a whole, and by individual member states, in moving towards or maintaining a high degree of price stability has continued during 1996,” says the report.

To join the euro-zone, member states should have inflation rates within 1.5 percentage points of the average rate in the three countries with the best record in keeping prices down.

For this year, the Commission sets this threshold at 2.6&percent;, meaning that Finland, the Netherlands, Germany, Belgium, Denmark, France, Ireland, Luxembourg, Austria and Sweden all hit the target. The UK and Portugal miss by a mere half-point.

A better record on fighting inflation and increased market confidence in the budget-cutting intentions of EU governments have meant that the price member states have to pay investors to hold their debt has also dropped sharply.