Single currency ball now in French court

Date: 05/06/1997

DOMINIQUE Strauss-Kahn will have the most eager of audiences at his first meeting with fellow European finance ministers next week.

They desperately want to know whether the newly appointed French minister had his fingers crossed behind his back when he drafted the Socialist Party's economic policy programme.

If he did not, there is no way that the value of the French budget deficit is going to be brought below the monetary union qualifying level of 3&percent; of gross domestic product.

During a week in which the Swedish authorities announced they would stay out of the first wave of EMU members and German Finance Minister Theo Waigel climbed down in his battle with the Bundesbank over the value of his gold reserves, the prospects for the single currency have rarely looked less rosy.

Although the German gold conundrum has caused endless wry smiles among monetary officials who have had to face Bonn's 'holier than thou' rhetoric in the past, ministers are expected to hold their tongues at their meeting in Luxembourg on Monday (9 June).

But they will show no such reticence in cross-examining Strauss-Kahn on his plans. Even before luckless former Premier Alain Juppé left the Hôtel Matignon, the deficit targets of the French government were starting to look optimistic.

The positive gloss put on the situation by ministers back in February, when a revival in economic growth and tough public spending controls seemed to have put France on track for EMU, has gone.

Social security spending and revenues are wildly off target, with leaked data showing the deficit rising to 7 billion ecu this year and 9 billion ecu in 1998, compared with official forecasts of 4.5 billion ecu this year and balance next.

Charitable forecasters expected the deficit to be worth 3.2&percent; of GDP this year and have pencilled in an extra 0.2&percent; of GDP to take account of a small dose of 'Socialism'.

The plan, put together by Strauss-Kahn for Lionel Jospin and his new administration envisages an increase in the minimum wage and the creation of 700,000 new jobs, with half of these earmarked for the public sector.

Unless German Chancellor Helmut Kohl can scare Jospin with visions of the fall-out from a delay in the January 1999 start date for EMU, the new Socialist government is not going to push through another round of austerity measures just to hit the magic 3&percent;. “Three percent is not gospel,” said fellow cabinet minister Martine Aubry during the election campaign. “We will discuss how to appreciate the criteria differently.”

It will be impossible to come to an agreement on different deficit rules, as some Socialists have suggested, but Jospin and Strauss-Kahn will have the Maastricht Treaty on their side if they want to convince their

EU counterparts to take the trend of the budget into account rather than fetishising the 3&percent; figure.

If reports in the German press last week are true, Jospin may even have the tacit support of the Bundesbank.

German central bankers are reported to have told Finance Minister Theo Waigel that having a deficit slightly above 3&percent; of GDP was preferable to coming up with one-off gold revaluation schemes which threaten its independence.

The arrival of the left in Paris should also have a major impact on other aspects of the single currency scheme. The new cabinet will take an even tougher line than its Conservative predecessors in support of a 'stability council' to act as a political counterweight to the Frankfurt-based European Central Bank.

Wim Duisenberg, the Dutch central banker in line to become the first president of the ECB, is also under threat. French President Jacques Chirac has already made it clear that he does not support Duisenberg's candidacy and the Socialists are even more strongly against it.