Waigel has the last laugh

Date: 26/09/1996

GERMANY'S political and financial establishment is within three months of pulling off a truly remarkable coup.

Unless they suddenly develop cold feet, EU heads of state and government will agree at their December summit to the creation of a pact which will severely curtail their taxing and spending sovereignty.

Their finance ministers could not agree on exactly how this 'stability pact' should work when they gathered informally in Dublin last weekend, but the very fact that they were quibbling over details rather than principles shows how far they have moved towards accepting Bonn's agenda.

It is almost a year since German Finance Minister Theo Waigel unveiled his plan for a stability pact. It had two aims: to fill in the gaps in the Maastricht Treaty and set budgetary rules for monetary union members, and to convince an increasingly nervous German public that the Euro would be as beautiful as their beloved Deutschemark.

The treaty made it clear that certain rules had to be complied with and failure to abide by them would be punished, but it contained no deadlines or specifics about the penalties that would follow non-compliance.

Waigel's stability pact pro-vided rules and punishments aplenty. Once a member state joined the Euro-zone, it would have to keep its deficit well below 3&percent; of Gross Domestic Product in boom years, and overshooting this target would be punished automatically by forcing the country concerned to place a gigantic non-interest-bearing deposit at the European Central Bank (ECB).

If the budget had still not been put right within two years, the deposit would turn into a fine and sequestered by the EU budget.

Although they welcomed the proposal in public, privately other finance ministers variously had to suppress their shock or their laughter. Some saw it as a sly attempt to reduce Germany's contributions to the EU budget, others as a deliberate ploy to kill off monetary union. Optimists in Paris viewed it as a maximalist request which could be whittled down to something less frightening.

One year on, and the pact looks even more strict.

In Dublin last weekend, finance ministers were handed the European Commission's version of the stability pact. If any of them thought that the Commission was going to tone down Waigel, they were wrong.

Even before they lock exchange rates on 1 January 1999, monetary unionists will have to submit detailed 'stability programmes' to the Commission and their fellow finance ministers.

These will contain each government's objectives over the coming four years for its deficit/surplus, as well as for reducing its historic public debt. More remarkably, they will also include details of the budgetary measures each government will take to reach these goals and those that will kick-in if these targets are missed.

These programmes will be handed in every year, within two months of each government's budget proposals. After scrutiny by the Commission and the successor to the monetary committee, finance ministers will give their verdict within two months of the plan being submitted, assessing whether the budgetary measures proposed are sufficient.

Twice a year, ministers will measure each member states' performance against the programme's objectives and, “in the event of significant identified slippage”, they will recommend that budgetary adjustment measures are taken.

The only real differences between the Commission and Bonn which emerged over the weekend were over details - important details, but details nevertheless.

Germany wants the EU to set a six-month deadline between establishing that an excessive deficit exists and imposing the cash sanction, it wants the deposit to have no limit and it wants the rules to apply to all member states unless they topple into a major recession (2&percent; negative growth over four consecutive quarters).

For its part, the Commission prefers a nine-month deadline, deposit/fines capped at 0.5&percent; of GDP and ministers to be given discretion over when to excuse a member state from the rules because of force majeure.

The remaining three formal meetings of the Ecofin Council between now and the December summit will wrangle over these three minor differences between the two plans.

Although ministers held a long discussion on the pact at their weekend meeting, the debate was not over whether a pact was needed. As UK Finance Minister Kenneth Clarke put it: “There was a Commission proposal and a German proposal and most of the contributions were a bit like one or a bit like the other.”

But step back for a moment and consider what is taking place.

Right from the moment when work on designing the blueprint for monetary union began, it was accepted that responsibility for conducting monetary policy - setting interest rates and defending the value of the currency - would be taken from the hands of governments and given to the European Central Bank (ECB).

However, fiscal policy has always been jealously guarded, with member states insisting on retaining the right to defend what they increasingly call their 'social model'. The Treaty of Rome allowed for so-called 'multilateral surveillance' of their general economic policy, but Union institutions were always to be kept clear of decisions over how governments should spend their money.

This is no longer the case. In theory, these stability programmes will merely show how the budget will be kept close to balance and the Council of Ministers will steer clear of recommending public spending cuts over tax increases.

But does anybody believe this will happen? If Finland's or Sweden's deficit went out of control, would the Council of Ministers really allow Helsinki or Stockholm to raise taxes rather than cut spending when their tax rates already distort their economies?

Would Germany ever again turn a blind eye to the kind of financial trickery that will allow the French government to benefit this year from a 6-billion-ecu one-off payment from France Télécom to assume the company's pension liabilities, or dip into its savings at the Caisse des Dépôts et Consignations to the tune of 3 billion ecu?

Already, in Dublin, German officials made their feelings about the Télécom transfer quite plain.

But when did it become acceptable for domestic French fiscal policy to be criticised by anyone else? Using the pensions payment to reduce the deficit appears to be within the rules of the EU statistical office and as for withdrawing cash from the CDC, that is up to French Finance Minister Jean Arthuis since the deposit is his.

Even those countries left outside the first wave of monetary union membership will not be free from interference.

They will be asked to draw up convergence programmes setting out all the same details as those required from member states governed by the terms of the stability pact. Economics Commissioner Yves-Thibault de Silguy has even taken to calling them 'convergence contracts'.

If their targets are not met, new punishments have been devised. Not only will they not be allowed to join the Euro-zone, but - assuming their currencies are tied to the Euro by the new-look Exchange Rate Mechanism - the ECB will also cease to support them at their margins.

When they need to devalue, the ECB will come along and give them a helping hand. It was typical of Alexandre Lamfalussy, the EMI's gentlemanly president, to present the governors' natural predatory instincts as an act of kindness.

“No government wants to devalue because it is a loss of face and an exclusively political decision of this kind is a very difficult responsibility for them to carry,” he said. “The idea of giving the right to the European Central Bank to initiate a realignment is to depoliticise the process and it could be very helpful to the governments themselves.”

A decade from now, finance ministers may wonder just how their predecessors were seduced into these agreements.