Stability depends on credibility

Date: 19/09/1996

A FTER months of debate, EU finance ministers appear close to a deal on how to ensure budgetary discipline in the single currency zone - and this week's letter to EU leaders from German Chancellor Helmut Kohl will undoubtedly have helped concentrate minds.

But as is so often the case, the devil is in the detail. All now appear to accept the idea of a 'stability pact' along the lines suggested by Germany, but divisions remain over key issues such as the size of any financial penalty to be imposed on a member state which strays from the path of righteousness and the depth of recession needed to allow a government which overshoots the targets to appeal successfully for leniency.

These are not, as some reports have suggested, minor matters which can be resolved relatively easily. As Chancellor Kohl suggests in his letter to EU leaders, the very credibility of the EMU plan is at stake.

Yet Germany appears intent on sticking to its demands for a pact with teeth so sharp that they could eat away at the very credibility that the Germans are so anxious to achieve.

Take for example Bonn's rejection of any suggestion that the fines imposed on recalcitrant member states should be capped at 0.5&percent; of national income. Even with such a maximum, the fine would be so huge - amounting to a staggering 5 billion ecu in the case of France, for example - that countries inside the single currency bloc would be reluctant to impose it on a fellow member and transgressors would face a huge backlash against the EU at home if they agreed to pay it. EU history suggests that such severe penalties are, in fact, rarely enforced. In 1994, Italy succeeded in slicing 500 million ecu off a 2.4 billion ecu fine for blatantly exceeding its milk quotas.

Recent German history also suggests that a timetable of six months between identifying an excessive deficit and winning parliamentary approval for measures to eradicate the shortfall is over-ambitious. Bonn acknowledged in March that it had missed its 1995 target and would overshoot again in 1996, but parliamentary backing for extra spending cuts to bring government finances back on track was only secured this week - and that in a country which prides itself on fiscal rigour.

Similarly, the tough criteria which Germany wants to set for judging when a recession is deep enough to justify a reprieve are so stringent as to ensure they will never be met. Even after the two oil shocks of the Seventies, no European country has experienced a recession as deep as Bonn's definition would require.

Setting targets which are unachievable would do more to undermine the credibility of the EMU venture than any relaxation of German demands, as demonstrated by the cries of derision which have greeted over-optimistic budgets from those member states which seem keener on saying they are on course to qualify for the single currency than on actually doing what is necessary to reach that goal.