Italy fails first test to join single currency

The European Commission yesterday declared Italy unfit to join the single currency, based on present economic forecasts, causing sparks to fly in Brussels and creating political ructions in Rome.

The row over Italy's failure so far to make the Euro-grade gave a foretaste of the bitter divisions which will break out across Europe when the final rulings on which countries qualify to join the single currency are made next year.

Prior to release of the data, the Italian government, headed by Romano Prodi, who has staked his future on bringing Italy into the single currency at the launch, was widely reported to have exerted pressure on the Commission to alter the figures. Emma Bonino, the Italian commissioner for consumer affairs, protested vigorously over the Commission's findings.

On other fronts, however, the Commission's outlook was suprisingly optimistic. Figures showed that a total of 13 countries - including Germany, France, Britain and Spain - will meet the key economic test, which requires countries to bring their public deficits down to 3 per cent of gross domestic product.

This was many more than indicated by separate forecasts yesterday from the International Monetary Fund. In its view, seen as far more realistic by the financial markets, France, Germany, the UK and Spain will also just miss the 3 per cent target.

There is slower progress on the reduction of debt in the Commission's forecast, but it clearly believes its optimistic new growth forecast of 2.4 per cent for this year will help most countries turn the corner.

Both Spain and Portugal are also expected to make the grade, although many analysts predict that it would be politically impossible for Europe to refuse entry to Italy, a founder member, while accepting Spain and Portugal.

Yesterday's Commission figures were awaited with unprecedented interest as the deadline for decision-time on economic and monetary union draws nearer. Decisions on which countries qualify will be based on economic figures for this year, and will be made at a special council by heads of state and government in May next year, ahead of the launch on January 1st 1999.

Britain, which is expected to have brought its deficit down to 2.9 per cent of GDP this year, is now highly likely to qualify, unless other states continue to insist that the requirement to be part of the exchange rate mechanism be strictly enforced.

During the increasingly Euro-sceptic debate characterising the British election campaign, both main parties argue that Britain must continue to "wait and see" before deciding whether to join EMU at the launch, giving the electorate the impression that decision-time for Britain still lies some way off.

However, as yesterday's announcement in Brussels reaffirmed, most other member states are already lining up at the starting gate.

Under the Maastricht Treaty, Britain must notify its partners of whether it wishes to be considered for membership of the EMU by the end of this year.

Any suggestion that Europe is "fudging" the convergence criteria in the final months will be seized on by British Euro-sceptics as further grounds to stay outside and will also spur conflict between other member states.

Yesterday Yves Thibault de Silguy, the economic commissioner, rejected suggestions that there had been any "tinkering or trading" with the figures, and presented his experts' findings as proof that Europe was now "well on the road" to the EMU launch.

However, supsicions about the way the Commmission has calculated its forcasts remain. Yesterday Mr de Silguy was challenged to justify how the Commission could have produced such a long list of qualifiers, in view of more cautious economic forecasts, from other expert bodies.

IMF world forecast, page 21