German spurt boosts single currency hopes

Germany has moved within sight of the fiscal targets laid down by the Maastricht Treaty, increasing pressure on other would-be members of European monetary union to rein in public spending.

With better than expected figures on German government finances yesterday providing a tonic for Europe's single currency hopes, the European Commission President, Jacques Santer, said plans for a single currency were beyond the point of no return and critics should end their "diatribe of doubt".

The Nobel prize-winning economist Milton Friedman became the latest to add his voice to the chorus of EMU-doubters yesterday, warning in a German newspaper that Europe, with its diverse languages, traditions, industries and labour markets would not be ready for currency union on 1 January 1999.

But in a strongly worded statement Mr Santer labelled such comment "irresponsible" and insisted delay was not only unnecessary but legally impossible. Calling for an end to speculation, Mr Santer said he was convinced a "substantial" number of countries would meet the qualifying targets on time.

Thanks to a recovery in economic activity in recent months, Germany's prospects of meeting the required targets look brighter than they have for some time.

The government's budget deficit fell to 3.1 per cent of GDP in the first half of this year. With growth accelerating and tax revenues increasing, analysts now believe Germany is on course to hit the target figure of 3.0 per cent for the whole of 1997.

Two sets of official figures published yesterday underpin renewed hopes that Germany will fulfil all but one of the Maastricht criteria without undue fudging. To the surprise of all observers, including government officials, the Federal Statistics Office reported that last year's government budget deficit had been 3.5 per cent - 0.3 percentage points lower than previous estimates. In the first half of this year, despite the sluggish economy and mass lay-offs, the deficit shrank to 3.1 per cent.

Some of the improvement was due to the adoption of EU accounting standards, which exclude investment in hospitals from government expenditure. Even so, the figures show that the deficit in the first half of 1997 was 0.3 points lower than the corresponding period last year.

As the economy picks up, analysts said there was every chance that the government would deliver the 3 per cent figure in time for the final weigh- in for monetary union. Evidence that the German economy had turned the corner also came from the growth figures isued yesterday by the Statistics Office.

According to these, GDP in the second quarter was 2.9 per cent higher than the corresponding period in 1996. Separate figures from the Bundesbank, adjusted differently, showed pan-German GDP growth of 2 per cent in the year to the second quarter. Together these suggest that Germany is heading for annual growth of 2.5 per cent, in line with government targets.

However, the recovery is being driven almost entirely by exports, boosted by the low exchange rate of the mark. Investment in equipment grew only by 0.3 per cent in the second quarter and consumer spending remained in the dumps. With unemployment still on the rise, there appears little prospect of the long-awaited pick-up in domestic demand.

Nevertheless, meeting the most important Maastricht criteria - although total public debt is still set to climb over the 60 per cent threshold - will save the government a great deal of embarrassment.

Chancellor Helmut Kohl, looking upbeat for the first time in months, said: "We want a stable currency and the euro at the right time, and we have a good chance of achieving that." He told a rowdy session of the Bundestag yesterday: "There is no alternative."

The implication is that Bonn will now feel able to resume its favourite role as Europe's disciplinarian. It will turn a blind eye to France's performance, close enough to 3 per cent. But Italy's hopes of sneaking in behind a limping Germany have been dimmed.

Nevertheless, Mr Santer insisted that the single currency would go ahead on time. "The end is in sight. This is not the time to frighten off the public about the solidity of the single currency," he said. Commission lawyers had advised that postponement would in any case be "legally untenable".

Mr Santer admitted that urgent steps had to be taken to tackle Europe's unemployment crisis. He called on EU governments to reduce taxes on employment and raised the prospect instead of new taxes on energy.

It was "crazy" he said that only one in ten of the unemployed were on training schemes and that unemployment benefit was paid out to millions without any corresponding incentive to retrain or upgrade skills. Mr Santer also said he favoured a reduction in working hours.