EMU’s pre-flight checks

Date: 26/03/1998

As Brussels prepares to host its most crucial EU summit to date, Tim Jones reports on the challenges facing Union finance ministers as they attempt to put the finishing touches to the single currency

BRUSSELS will never have seen anything quite like the May Day weekend summit.

There has been many a nail-biting ministerial meeting in the Belgian capital. The last-minute diplomacy of the Uruguay Round trade-opening deal four Christmases ago, for example, was a cracker.

But there has been nothing to compare with the scale, importance and sheer logistical difficulties of the summit of 1-3 May.

During the course of that weekend, on the basis of the reports published by the European Commission and the European Monetary Institute yesterday (25 March), 15 heads of state and government will decide whether to form a monetary union in Europe and who should be in it.

But that is just the tip of the decision-making iceberg.

On Friday 1 May, finance ministers will begin their session of talks in the huge Justus Lipsius building on Brussels' Rond-Point Schuman.

Touchingly enough, they have decided to hold the meeting 'outside market hours', meaning that it will start around tea-time. For all their talk of globalised markets, the EU's finance chiefs still seem to think that market participants will pack their briefcases and head home early Friday evening, even though all the major City of London banks have already made plans to continue trading into the weekend.

Under the chairmanship of the UK's Gordon Brown, ministers will have to take a number of formal decisions.

First, they must decide by qualified majority vote whether to remove a number of member states from the blacklist of countries deemed to have an 'excessive' budget deficit under the terms of Article 104c of the Maastricht Treaty.

This excessive deficit procedure began in 1994, once the treaty had been ratified throughout the EU. In its first year of operation, only Luxembourg and Ireland were found to have met the treaty's requirements that budget deficits should be below 3% of gross domestic product or, if knocked off course by a temporary economic recession or external shock, should remain "close to" this figure.

The treaty also stated that the ratio of public debt to GDP should approach 60% "at a satisfactory pace", prompting German Finance Minister Theo Waigel to complain long and hard at the time about the decision to remove Ireland - which had public debt worth more than 80% of GDP - from the list of countries with excessive deficits.

He made a similar fuss two years later when Denmark was excised from the list, even though its debt-level was more than 70% of GDP.

This May, there should be unanimous agreement that the 'excessive' deficit tag can be lifted from Germany, France, Italy, Belgium, Sweden, UK, Austria, Spain and Portugal, so that they can join last year's star pupils Luxembourg, Ireland, Denmark, Finland and the Netherlands.

Only Greece will stay on the list, although there will surely be some discussion of Italy's performance in reducing its stock of debt. When Denmark and the Netherlands were taken off the blacklist, they were able to show a substantial reduction in the debt (at least six percentage points off the debt-to-GDP ratio over three years), while Italy can only show two or three points at most.

Waigel will be unable to repeat his objections of previous years because even a hint that he was concerned about Italy's debt burden, never mind any suggestion that he had voted against removing them from the blacklist, would have a devastating market impact.

The finance ministers will then turn to the EMI and Commission reports on whether each member state is ready to form a monetary union. On the basis of a recommendation from the Commission, ministers will take a qualified majority vote on whether each country has satisfied the conditions. They will then formulate their recommendation to prime ministers and presidents, who will meet the next day.

Ministers will also make a formal proposal as to who should sit on the six-member executive board of the European Central Bank, including the sensitive issue of who should be its president and vice-president.

An end to Franco-Dutch hostilities should have been achieved by then, with current EMI president Wim Duisenberg emerging as the first head of the ECB while his rival, Bank of France Governor Jean-Claude Trichet, becomes vice-president.

The remaining members of the ECB's executive board will also be agreed unanimously, and are tipped to include the governors of the Spanish and Finnish central banks and the chief economist of the Bundesbank. Brown will try to ensure that one of this select band's term of office comes to an end around 2002 so that a British representative can be inserted if he gets his way and the UK joins EMU early in the next century.

Finance ministers will also have to adopt a number of provisions in the ECB's statute. These set out when the bank should be consulted by governments on economic policy, its powers to collect statistics, whether it should set reserve requirements for commercial banks or other special forms of monetary control, establishing the capital base of the ECB and the key for member states to supply capital or foreign exchange reserves. In addition, ministers will establish a committee to draft the contracts and terms and conditions of the ECB president and vice-president.

Other uncontentious legal texts also remain to be formally approved. These include the technical specifications of the euro and cent coins and the legal framework for the euro itself, which cannot be fully adopted until a decision is taken on which member states will be in EMU.

Finally, ministers will have to decide the rates at which each participating currency will be locked against its neighbour - almost certain to be the current central rates of each currency within the Exchange Rate Mechanism. The locking against the euro itself will not, however, take place until midnight on 31 December this year.

Once these decisions have been taken, Brown will present them to the European Parliament's economic and monetary committee, which will convene at 8am on Saturday morning in the Léopold building just up the road. Committee chairman Karl von Wogau will then produce a report for a special plenary session of the Parliament, meeting at 10am.

Most of the key decisions cannot legally be taken until the Parliament's formal opinion has been obtained. A vote in favour of Von Wogau's report will be taken by MEPs, probably by midday, and forwarded to the gathering heads of state and government back at the Justus Lipsius building.

The decisions already taken by their finance ministers will leave heads of state and government with the simple task of rubber-stamping their work, and giving EMU the ceremonial send-off to which it is entitled.

The whole exercise is meant to be cut and dried in time for the opening of the markets in Asia on Monday morning, although that will not be quite the end of the story.

The Parliament's economic and monetary committee and its monetary subcommittee will then distribute questionnaires to the ECB executive board candidates and invite them to attend confirmation hearings on Thursday and Friday of the same week. Some of these may turn out to be rough, but MEPs will not be able to upset the apple-cart because they do not have the right to refuse to confirm any of the member states' candidates. Preparations will then be made to establish the ECB on 1 July and to recruit up to 150 staff members.

Then could come the trickiest bit. Having announced their bilateral conversion rates, national central banks will be obliged to defend them throughout the remaining eight months of 1998.

Major feature previews the May Day weekend summit on EMU, Brussels, 1-3.5.98.