Monetary union has impetus behind it

The 'Ecofin' meeting in Brussels yesterday - the meeting of the European Union's economics and finance ministers - was a short but useful reminder that there there is still a powerful impetus in Europe towards some sort of monetary union - even if it is not going to take place in quite the way the Maastricht treaty envisaged.

The impetus comes from three quarters: political, administrative and economic.

Not much needs to be added on the political front, for the political case for economic and monetary union remains the same as when Maastricht was signed. The new elements this summer are administrative and economic.

Here in Britain, not many people appreciate the speed at which the administrative framework for a union is racing along.

The European Monetary Institute, the embryonic European central bank, has formally been in operation since the beginning of the year, but until November remains in Basle, where the Bank for International Settlements provided its initial administrative base.

But in November it moves to glitzy new premises in the 'World Centre' in Frankfurt. It is charging around at the moment hiring people, and aims to have 200, half of them professionals.

It has to. Its function (aside from administering the European Monetary Co-operation Fund, which settles EU central bank debts) is to get ready for EMU: to make sure that all the administrative details are in place by 1997 should the EU decide to go ahead.

It has what it calls its 'master plan' for monetary union and its job is to carry that out, not to ask rude questions of its political masters about the viability of the Maastricht timetable. Making sure that the details work does not, of itself, create the conditions necessary for monetary union.

In any case the decisions on whether countries qualify on the convergence criteria is a political one - look at the inclusion of Ireland now.

But while having a seasoned bureaucracy sorting out the details does not alone hasten union, it does add credibility. Hire clever professionals and they will produce seemingly credible plans.

The other newish element this summer is the way in which currency convergence has happened without the support of the rules of the exchange rate mechanism. All the remaining ERM countries, with the exception of Denmark, have their currencies back inside their old ERM narrow bands, and Denmark is only just outside. This is in contrast to the position, or to expectations, in the spring.

The de jure position is that they must be within 15 per cent bands - de facto that they are within 2.25 per cent bands. Why?

There are several reasons. One is that the German economy has turned up much faster than most comentators expected, helping the exports of Germany's closest trading partners, and so taking economic pressure off them.

Another is that German interest rates have come down faster than had previously been expected, thereby reducing the political pressure to go it alone and cut rates ahead of Germany.

There is also a greater unanimity on economic policies among Germany's partners, especially France, than appeared likely a year ago.

And, finally, if you are running a small open economy with borders to Germany (such as the Netherlands) there are strong practical reasons for hoping that your currency maintains a stable relationship with the mark.

What happens in 1997, or 1999, to EMU, is of course still wide open. If non-ERM countries (including Britain) sustain a more vigorous, but still low-inflation recovery than their ERM partners, the economic case for union will appear weaker.

If, two years from now, the indigestion in the German bond market were to push long-term German rates above sterling rates - unlikely but not impossible - the case for joining in what is really a DM bloc will be weaker still. But EMU has not gone away; nor will it easily do so.