Name is only significant obstacle to a single currency accord

Date: 14/12/1995

By Tim Jones

FOUR years after they signed a treaty committing themselves to form an economic and monetary union by the turn of the century, next week EU leaders will agree the 'A to Z' on exactly how they should get there.

In Madrid, the heads of state and government will be presented with a ten-page document by their finance ministers.

Hundreds of hours of work and negotiations between number-crunching experts have been distilled into a short paper showing where member states agree and highlighting the remaining obstacles to a deal.

What they have agreed already is that the countries willing and able to form a monetary union will fix their exchange rates irrevocably on 1 January 1999 and hand over monetary policy to a European Central Bank.

For three years, only these national currencies will be legal tender in the single currency bloc and can be swapped with each other at the same fixed rate for all business. Then, over a six-month period in 2002, banknotes and coins in the European currency will be introduced.

At the end of that period, only the new currency will be legal tender and marks, francs and guilders will be consigned to money museums.

Most of the work has been done. The differences have been narrowed down to a battle of wills between Germany and France over the name of the currency and how to ensure the change-over to the 'Euro', or whatever they decide to call it, will be irreversible.

At the heart of these problems is the French government's desire to ensure that Bonn's commitment to the single currency is total. If President Jacques Chirac has to endure strikes and civil unrest against his plans to rein back social security spending in pursuit of the single currency goal, he wants to be certain that it is worthwhile.

That means the decision on who should be chosen for monetary union membership should be made sooner rather than later and governments should switch as many of their financial operations into the new currency as early as possible.

At the last meeting of EU finance ministers (Ecofin) in Brussels on 27 November, France's Jean Arthuis would not agree to a German request to leave the assessment of which countries should form a monetary union until early 1998.

This, he feared, would give too little time to get the new European Central Bank up and running on 1 January 1999. Paris wants to use the latest provisional figures on budget deficit reduction and price stability available in December 1997, rather than waiting into the New Year for the definitive data.

“The priority above all others is 1 January 1999,” he said. “In December 1997, we will have reliable data and we need a satisfactory time period for the central bank to prepare for 1999.”

The Germans are insisting that the data should be the latest and most reliable, and that means waiting for the full figures as late as the spring of 1998.

The second bone of contention between the two sides is over whether participating governments should swap over their new debt issues into the single currency as early as possible after January 1999. Germany believes this is unnecessary and even gimmicky, while the French think it would be an important symbol of the irreversibility of the transition to a single currency.

The latest compromise proposal from the 27 November Ecofin called on member states to convert a “substantial and rapidly increasing” amount of their new debt into the single currency during the three-year change-over.

Since, over a three-year period, most of the participating member states' 1-trillion-ecu plus debt would have been refinanced in the new currency anyway, observers believe this to be a slightly false debate which can be settled easily at the summit.

“They should be able to find a solution for that,” said a monetary official. “It seems to be a question of drafting skill.”

It appears that the French government is holding back on agreeing on the name of the currency in order to win concessions on these other points from Germany.

German Finance Minister Theo Waigel has won over 12 member states to his idea of calling the European currency the 'Euro'. The Ecu, which had been the only runner for years, is the name of a 'basket' currency which has frequently been devalued against the mark. For this reason, it is associated with failure and cannot be accepted.

But France is still attached to the Ecu and will want concessions in return for accepting the name 'Euro'.

The two countries still reluctant to express an opinion are the UK and Denmark, both armed with the ability to opt out of the single currency. For UK Prime Minister John Major, the debate over the name of the new currency is a “convenient distraction from the issues that matter most”: the institutional impact of having an inner and an outer core, and how to address the Union's chronic unemployment problem.

Indeed, once the debate over the 'reference scenario' is out of the way, finance ministers will be called back into the room to talk jobs.

Their discussion will be based on the multi-annual employment creation programmes drawn up by member states and grouped together by Ecofin and the Social Affairs Council.

Centring on so-called 'structural measures' to create jobs, rather than the old-fashioned stimulation of demand through budgetary expansion or the easing of monetary conditions, the report foresees a substantial increase in job numbers in the coming decade.

But as the French government is already discovering, pulling out all the stops to meet the single currency targets will not create jobs in the short lifetime of a government.