21 September Ecofin Informal

Date: 26/09/1996

EU FINANCE ministers gave their political support to a framework plan for creating a revamped Exchange Rate Mechanism (ERM) for member states left outside a single currency zone. The proposal was presented to the meeting by European Monetary Institute President Alexandre Lamfalussy. Under the plan, the new system would have broad trading bands of 15&percent; either side of a central rate against the Euro, and outside currencies would not be linked to each other. The proposal also allows for countries wishing to have a narrower band to negotiate this with the European Central Bank and finance ministers. The summit in Dublin on 13-14 December will approve the outlines of the plan, with a final text due to be adopted in Amsterdam in June 1997.

IN A linked agreement, ministers accepted a proposal from the European Commission that countries outside the Euro zone which wanted to join the club should sign 'convergence contracts'. These would give explicit targets for inflation and budgetary consolidation in line with the existing convergence programmes and include details of measures to be taken if these targets were missed. Failure to stick to these measures would mean that the ECB would be within its rights to suspend intervention in the foreign exchange markets in support of that country's currency. Moreover, intervention that threatened to cause inflation inside the Euro zone would be stopped and a realignment initiated. This would not be the sole preserve of the ECB, but would also involve ministers.

MINISTERS also reached an informal compromise on how to define the status of the Euro and which legal base to use for this. For three urgent questions which cannot wait until the first countries to join the Euro are chosen in early 1998, the Commission will draft a text using Article 235 of the Maastricht Treaty - allowing the institutions to take action “if it should prove necessary to meet the objectives of the treaty”. These three questions are: the name of the Euro, a pledge that currencies in existing contracts should be converted into the Euro at the exchange rates decided by finance ministers when monetary union begins on 1 January 1999, and a one-for-one conversion of the Ecu into the Euro. Other less urgent issues will be dealt with under Article 109L(4) of the Maastricht Treaty and will only cover countries in the Euro bloc. A final text will be drawn up in October and should be approved by the December summit.

COMMISSION President Jacques Santer gave ministers a presentation of the latest soundings taken by his services on the economic situation in Europe. He said the European economy was now at a “turning point” in the cycle and the second half of the year should “see a gradual acceleration in growth”. Santer said this would be based on historically low inflation (at 2.6&percent; in July), continuing falls in short-term interest rates, the renewed stability of European currencies and the appreciation of the US dollar. Recovery is getting under way in some countries - Germany, the Netherlands, Denmark and Belgium - while the UK economy is growing at close to its potential. Overall, EU growth should be around 1.5&percent; this year and between 2&percent; and 2.5&percent; in 1997. ministers were given a report from a group of their personal representatives under former Director-General Eamonn Gallagher. This committee had been tasked with looking into Santer's proposal to adjust the EU's financial perspectives by raising the ceiling on internal policy spending by 1 billion ecu and cutting spending by 200 million ecu. This would free up 1.2 billion ecu to be spent on plugging financing gaps in five of the 14 Trans-European Network transport projects. The report said that a majority of finance ministers would not agree to adjust the financial perspectives, while the European Parliament would not agree to spending cuts without such an adjustment. A final decision on accepting the Gallagher recommendations will not be taken until finance ministers meet again formally in Luxembourg on 14 October.

THE afternoon session was devoted to the question of how to enforce budgetary discipline within a monetary union. The Commission came forward with a working document showing how it intended to turn German Finance Minister Theo Waigel's 'stability pact' into a Union-wide initiative. Ministers had already agreed before the meeting on the need for such a pact, that budget deficits within the Euro-zone should never exceed 3&percent; of GDP unless such an overshoot was “temporary” and “exceptional”, and that persistent failure should be met with cash sanctions. However, they did not reach agreement on several key issues. Waigel wants the delay between identifying an excessive deficit and punishing it with a forced bank deposit to be kept to six months, the Commission wants nine months and some member states want 12 months. Irish Finance Minister Ruairi Quinn believed a consensus was forming around nine months. No agreement was reached either on whether the terms “exceptional” and “temporary” - in defining the depth of recession that justified missing a budgetary target - should be put into figures. The monetary committee meeting on 6 October will attempt to narrow the differences and make recommendations for the three remaining formal Ecofin meetings to consider before the December summit.