Next week’s ‘Enlargement Ecofin’ summit in Sweden could be overshadowed by talk of splits emerging at the European Central Bank

Date: 12/04/01

By Tim Jones

MALMÖ Scania Convention Centre is still doing its pre-meeting fire drills, filling up its kitchen stores for under-fed journalists and building stands for sponsors. But as far as agenda-setting goes, the fight has been lost.

The EU's Swedish presidency may have christened next week's six-monthly strategy meeting of finance ministers 'the enlargement Ecofin' but the financial press has already set another agenda entirely.

A kite-flying exercise in the Financial Times means that, just when you thought it was over, the stiletto-polite battle between European Central Bank President Wim Duisenberg and Bank of France governor Jean-Claude Trichet will be on everyone's lips in Sweden's southernmost city.

The ECB pair's apparent differences on policy emphasis, plus the seemingly unbreakable conviction that governments can do something to stop global recessions, will be Malmö's themes - much to the chagrin of Swedish Finance Minister Bosse Ringholm. Every host likes a theme for an 'informal' and Ringholm has a long-term investment in central and eastern European accession.

The more countries queue up for euro-zone membership, the easier it will be for the euro-enthusiast finance minister to convince his own people that the club must be good if everyone wants to join it. It's known as the Manchester United effect.

But this is a long game. The greatest criticism levelled at the more 'virtuous' of the central and eastern European countries' (CEEC) finance ministers is that they are too concerned with readying their economies for euro-zone membership instead of laying the groundwork for joining the EU.

Austrian National Bank governor Klaus Liebscher is the latest EU policy-maker to question the wisdom of trying to meet all the euro zone's entry rules when an economy is still in transition from communism. “Applicant countries would be well-advised to stick to the inflation criterion and use their pre-accession phase to orient their monetary and fiscal policies to this goal,” he said.

An EU diplomat intimately involved in preparing a key applicant state for membership points out that “when Spain, Portugal and Greece joined, our [gross domestic product] fell 6&percent; but if ten of the enlargement states joined now, EU GDP would fall 15&percent;. These governments should keep their budgets under control but, above all, they need their economies to grow.”

The Czech government appeared to be taking note this week after approving a €7-billion “big-bang” spending hike aimed at stimulating growth after three years of recession followed by a sluggish (for the region) 3.1&percent; last year. Global debt rating agencies warned that the budget deficit excluding revenues from state asset sales would top 9&percent; of GDP this year - three times the entrance threshold for the euro zone.

The fact is that far though the frontrunners have come since the implosion of communism, they're still playing catch-up. The Organisation for Economic Cooperation and Development's latest figures for GDP per head - the standard measurement of a country's wealth - show even the big favourites for early membership lagging well behind the EU. In 1999, Czechs produced €5,710 per head, Hungarians €5,300 and Poles 4,445 - compared with an EU average of €25,000 and less than half that of the Union's laggard, Greece.

“There's not a lot we can tell them except to keep on converging and not to get impatient,” admits a cynical diplomat preparing the meeting. “It's hard for a lot of us to tell them all about structural reforms, privatisation and liberalisation when you look what's happening within the EU.”

Internal Market Commissioner Frits Bolkestein will make a stab at accelerating the drive to structural reform in Malmö when he sets out his novel plan for EU-led tax reform - abandoning pointless omnibus legislation that will languish for a decade in the the Union's 15-sided chess game and instead plugging loopholes and enforcing existing laws.

Central to this is an attempt to enforce treaty provisions outlawing curbs on free movement of capital and nurturing a pan-EU market in private pension provision. Bolkestein wants ministers to approve his idea of achieving this aim by challenging tax regimes that discriminate against contributions to foreign pension schemes in the European Court of Justice. But even Ringholm's initial reaction is unfriendly. “It's not necessary to have a common attitude to taxation; it's more important to make our pension systems sustainable,” he said.

Pressure will increase on the ECB after Wednesday's decision to leave interest rates unchanged. Signs are growing that the euro-zone economy is slowing down and taking the air out of price inflation with it.

The ECB's favoured target, annual growth rate of broad money - currency in circulation, easily cashed deposits and short-term debt instruments - has decelerated from a high of 6.7&percent; in April last year to 4.7&percent; in February.

Germany's six leading economic research institutes revealed this week that they expect the economy - representing a third of euro-zone output - to grow by 2.2&percent; in 2002, up from 2.1&percent; this year. Germany grew 3.0&percent;

last year and in the autumn, the institutes' expected the economy to grow 2.7&percent; in 2001. Economics Commissioner Pedro Solbes will find it increasingly hard to stick to his line that euro-zone GDP will grow “around 3&percent;” this year as he prepares to unveil his staff's forecasts on 25 April.

Nobody on the ECB's governing council wants their reputation to be as tarnished as that of the formerly infallible Alan Greenspan, chairman of the US Federal Reserve. As French officials signal the opening of his presidential campaign, Trichet is already playing an expert game of implying a greater commitment to sustaining economic growth than Duisenberg - without actually saying it.

Just days after Duisenberg lamented that people often forgot that the ECB's central mandate was to ensure 'price stability' - defined as annual inflation of less than 2&percent; - Trichet made a keynote speech pointing out that “central bankers are sometimes portrayed as being excessively cautious and reserved with respect to economic growth. On the contrary, we are very much in favour of growth.”

While the speech went on to stress that price stability was a foundation for economic growth, the apparent difference in emphasis did the trick. “Trichet” and “growth” made the same headlines. He also took the unprecedented step of issuing a joint statement on the ECB's monetary policy stance together with Bundesbank President Ernst Welteke to coincide with a Franco-German finance summit in Rouen last week.

“This was just in case you didn't know who the real powers in euroland were,” says a senior EU monetary policy official.