Verona to dismay ‘big three’

Date: 11/04/1996

By Tim Jones

THE Verona meeting of EU finance ministers and central bank governors this weekend is likely to echo to the sound of harsh words as politicians play to the gallery back home.

But, as is so often the case, the reality behind the rhetoric will be quite different.

The EU's experts are likely to achieve the rare distinction of upsetting all of the 'big three' member states through the early work they have done on piecing together a budgetary pact within a monetary union and avoiding competitive devaluations by outsiders.

However, at their informal meeting, the Union's top financial decision-makers will make it clear that detailed plans for a 'stability pact' and a revamped exchange rate system are a long way off. “They are likely to agree on the basic principles involved, but operational decisions will not be taken until next year,” said a senior monetary source.

In the run-up to the meeting, attention has concentrated on veiled threats from the French government to force all member states into a new Exchange Rate Mechanism where competitive devaluations would be met by severe sanctions.

The single currency bloc would have the right to introduce safeguards against cheap imports from non-members. In addition, farmers would no longer be able to benefit from the mechanism which currently ensures that the value of their subsidy rises each time their country's currency devalues.

These draconian measures have been proposed at meetings of the monetary committee, which convened in Brussels this week to prepare for the Verona gathering, but have found few takers. “Nobody likes it,” said a source. “You would simply punish farmers rather than the governments.”

The meeting will open with oral progress reports from European Monetary Institute President Alexandre Lamfalussy and Monetary Committee President Sir Nigel Wicks.

“The starting point for the work is the current system,” said an official working on the ERM II analysis, “but with the idea that something less constricting than the former narrow band system is needed.”

An exchange rate system with wide trading bands, allowing for narrower bilateral ties at the request of the two countries concerned, and even a parity with no bands are all possible under the reformed system.

It is even feasible that the UK's demand that it should be allowed to stay outside a system that targets 'nominal' exchange rates could be accommodated, say officials. At the moment, the British government targets an annual inflation rate of less than 2.5&percent; and is committed to changing interest rates accordingly. London argues that keeping a steady rate of inflation means sterling's real exchange rate - what the currency can actually buy - has been stabilised.

“Some kind of overarching system including all these facets seems to be the only thing that will work and win over all sides,” said an official.

The jury is still out on whether Article 109m of the Maastricht Treaty, which tells each member state to “treat its exchange rate as a matter of common interest”, effectively commits the EU to a new ERM, or whether attempting to keep the exchange rate stable is sufficient.

What is most important, all the ministers will agree, is that they 'converge' certain economic indicators - inflation, budget deficits and long-term interest rates. The Commission is trying to convince member states that these two aims - convergence and exchange rate stability - can be achieved by adapting the 'stability pact' proposed by German Finance Minister Theo Waigel.

The treaty already commits member states to bringing their budget deficits close to 3&percent; of gross domestic product and keeping them there once inside a single currency area.

Waigel's pact builds on this by turning the Euro bloc into a club where failure to comply with the Maastricht targets would result in automatic fines imposed by a newly created 'stability council'. The Commission is insisting that the pact should not be a club created for and by its members, but an agreement among all 15 member states to bring down their deficits and keep their prices stable.

While Waigel could not argue with this, he needs a binding element in the agreement to be able to sell it back home.