Central bankers forge ahead on a European currency

Millions of Europeans may not realise it, but from Brussels to Frankfurt and London to Rome, bankers, treasury officials and national mint directors are busily drafting plans for a single currency.

By 2000, the ecu (European currency unit) is almost certain to be circulating in at least five countries - Belgium, France, Germany, Luxembourg and the Netherlands.

Experts from all 15 European Union countries are discussing details such as the time-scale for moving from fixed exchange rates to a single currency. Even though Britain looks unlikely to take part in monetary union, the chairman of the most important EUbody, the Monetary Committee, is Sir Nigel Wicks, the Second Permanent Secretary at the Treasury.

Yet even a currency union limited to five countries faces great obstacles. The chief problem concerns "convergence", that is, the degree to which countries poised for monetary union match each other's economic performances.

The Maastricht treaty stipulates that a single currency cannot be introduced in 1997, the earliest target date, unless a majority of countries meet certain conditions. Government budget deficits should be 3 per cent of gross national product, public debts should not exceed 60 per cent of GNP, inflation rates should be no more than 1.5 percentage points above the three lowest-inflation EU states, and long-term interest rates should be no more than two percentage points above the three lowest-interest rat e countries.

Alexandre Lamfalussy, the president of the European Monetary Institute, Europe's central bank-in-waiting, said this week that the 1997 deadline was unlikely to be met. However, the treaty also states that monetary union should go ahead in January 1999 with all states that fulfil the conditions. The problem here is that only five countries - Denmark, Germany, Ireland, Luxembourg and the Netherlands - are forecast to meet the deficit target by 1996. And only four - Britain, France, Germany and Luxembourg - are expected to meet the debt target. Britain and Denmark have both reserved the right not to join a currency union.

According to the European Commission, matters will improve by 1999, and the deficit and debt targets could be met by Austria, Britain, Denmark, France, Germany, Ireland, Luxembourg and the Netherlands. However, given the likelihood that Europe's economicgrowth will slow down, both deficits and debts are virtually certain to rise above the Maastricht targets in the future.

The political will to create a single currency is so immense in France and Germany that the project is likely to go ahead even if some countries, such as Belgium, do not fully meet the Maastricht criteria. A loophole in the treaty allows monetary union for countries judged to have deficits that are "temporary" or "substantially and continuously" falling.

However, if an exception is made for Belgium, countries such as Italy and Spain, which would like to join a currency union but are presently considered too weak, are likely to raise hell.

Two other serious difficulties lie ahead. One is that Germany's parliament and the Bundesbank (central bank), will resist any attempt to surrender the mark for the ecu if other countries fail to meet the strict Maastricht conditions. Public opposition toa single currency is high in Germany, where politicians and bankers often express fears of lax anti-inflationary discipline in Europe.

The second problem concerns France, which will not meet the Maastricht criteria without rigorous fiscal policies involving interest rate rises and unemployment even higher than the current rate of 12.6 per cent.

This raises the question of how successful monetary union will be if France fails to keep up with Germany in economic performance. The former president, Valery Giscard d'Estaing, says German's economy outweighs that of France by a factor of 3:2, and thismust be reduced to 4:3 if Franco-German co-operation is to stay effective.

So monetary union is by no means a foregone conclusion. However, a betting European would certainly put a few ecus on it happening before 2000.