Brussels to rule Greece out of EMU

The European Commission's upbeat forecasts for 1997 make it plain that it has ruled out only Greece on economic grounds from joining the single currency, reports Diane Coyle, Economics Editor.

It surprised nobody that the forecasts delivered the answer EU Monetary Affairs Commissioner Yves-Thibault de Silguy has always wanted.

In its last set of economic forecasts before it has to make its final recommendations on membership of the single currency to ministers next May, the European Commission has left only Greece on the wrong side of the finishing line. Although the other 14 countries do not meet every one of the Maastricht Treaty criteria to the letter, it is clear from the Commission document that Mr de Silguy will recommend they should be allowed to join EMU if they want.

Gordon Brown, Chancellor of the Exchequer, said yesterday that he would make a statement about Britain's intentions "at the turn of the year", although membership in the first wave was "very unlikely".

The EU nevertheless gave the British economy a clean bill of health, although predicting that it would slow sharply next year even as the continental recovery gathered steam.

Yesterday's forecasts were greeted with a degree of cynicism in the financial markets. "The Commission lives in Teletubby land where everybody talks nonsense and nothing ever goes wrong," said Alison Cottrell at Paine Webber in London.

She added: "It does make it plain what their recommendations on EMU will be."

The forecasts show all member countries except Greece and, by a whisker, France with a government budget deficit below the Maastricht ceiling of 3 per cent in 1997, the decisive year for qualifying for the first wave of EMU on 1 January 1999. It predicts that France's deficit will creep down to 3 per cent on the nose in 1998, good enough to describe its position as "sustainable".

A bigger question mark hangs over Italy, where Commission economists have assumed that the latest budget goes ahead as planned even though the government crisis in Rome has prevented any detailed discussion of how to implement the plans. Even so, Italy's deficit will rise to a predicted 3.7 per cent of GDP in 1998.

Mr de Silguy said Italy could meet the economic targets if it resolved its political problems. He turned to a sporting metaphor, saying: "When the runner has passed the last hurdle and has only a metre to go to the finish line, he doesn't then just turn around."

French and Italian politicians insisted yesterday that their countries would qualify in time. Finance Minister Dominique Strauss-Kahn said France would have "no problem".

David Marsh, European expert at the investment bank Robert Fleming, said there was a question mark over Italy's position. "There is a possibility they will not be allowed in because they haven't achieved sustainability," he said. The Germans would prefer narrow membership of the euro, excluding Italy, he said.

But Italy's prospects depend on the general level of US and world interest rates as much as the government's plans because interest payments on old debt account for more than all of the budget shortfall.

The Commission has become more optimistic about Europe's economic prospects since its forecasts in the spring. It has revised up expected growth for the EU as a whole to 2.6 per cent this year and 3 per cent next year, from 2.4 per cent and 2.8 per cent respectively.

Although this still leaves EU-wide unemployment above 10 per cent, it has allowed it to publish lower figures for the expected ratios of government debt and deficit to GDP, allowing the Maastricht hurdles to be cleared with a little more breathing space. The spring forecasts had shown Italy well above the 3 per cent limit.

However, the EU puts UK growth at only 2.1 per cent in 1998 after an expected 3.3 per cent rise in GDP this year. Most UK economists expect GDP growth to slow down to 2.5 per cent next year, but inflation to pick up to close to 3 per cent. The EU, by contrast, forecasts inflation staying at 2.4 per cent.