French keep to EMU deadline

Date: 13/03/1997

By Tim Jones

RESURGENT economic growth, tough public spending controls and a revival of tax revenues should put France on course to meet the entry rules for the European single currency by the end of the year, the country's budget minister insisted this week.

Far from accepting the growing belief in the financial markets that EMU cannot start on time, Alain Lamassoure says he is increasingly convinced it will happen, not least because France is on target to join the euro-zone on 1 January 1999.

“We are optimistic because we already respect four out of the five criteria and our budget is on course to respect the fifth. As for the date, it is a fundamental political given,” he said in an interview with European Voice.

Rumours of plans to announce a delay to EMU have become the talk of the markets, with German unemployment - up by half a million in January to its highest level since the Thirties - causing a dramatic shift in perceptions in the currency and government bond markets.

Germany's budget deficit target of 2.9&percent; of gross domestic product (all euro-bloc applicants' deficits should be below 3&percent;) looks increasingly difficult to meet this year.

As a result, investors have abandoned their blind faith that the political weight of German Chancellor Helmut Kohl and French President Jacques Chirac would override any missed targets.

But Lamassoure believes there will be no need for any political fudging of the criteria.

He is sure that if economic conditions deteriorate and the German government realises that it must introduce another round of spending cuts and tax increases to hit the 3&percent; target, then it will not hesitate to do so.

For France, the numbers are improving fast. Last year, Lamassoure threatened to freeze public spending worth 3 billion ecu in 1997 if it looked as though the 3&percent; deficit target was going to be missed this year. Instead, last week, the government announced a spending freeze of just 1.5 billion ecu because economic growth was under way.

“We feel that all the motors of growth should be firing by mid-spring,” he said, adding that export growth was underpinning the recovery and being encouraged by a 10&percent; surge in the US dollar against the franc. France's historically low interest rates were feeding through into consumer demand, said Lamassoure, while company directors were suggesting that industrial investment should grow by 9&percent; in 1997.

Officially, at least, the government is forecasting growth of 2.3&percent; this year and Lamassoure does not want to change this yet, despite private sector predictions of anything up to 2.7&percent;.

“We will see later, during the spring, whether we will revise the forecast upwards but, for now, it seems reasonable,” he said.

One reason for his caginess is the unpredictable dollar. “The rise of the dollar has been vital for us; for selling high-technology products, such as Airbus versus Boeing, but also, at the other end of the industrial spectrum, for competing in textiles, toys, shoes and low-priced electronics with the low-wage countries of South East Asia,” he explained.

The good news for the budget minister is the catalytic effect that all this has on value added tax revenues, which were disappointingly low last year.

In case the economy starts to nosedive, Lamassoure is keeping the unused 1.5 billion ecu in frozen spending in reserve.

The minister found it hard to conceal his relief that the markets had turned their attention away from him and on to Germany, but there is no question of schadenfreude.

“No, we are in the same boat,” he said. “What is good for Germany is good for France and vice versa.”

At a Franco-German economic summit in Lyon yesterday (12 March), ministers of both governments once again stressed their determination to meet the 1999 deadline.