EU may fine Britain pounds 700m

Dublin summit: Monetary union and plans for expansion on course as device explodes at Bordeaux venue for Franco-British talks

European Union leaders have renewed their pledge to sign an ambitious new treaty overhauling the structures and powers of the EU by the middle of next year.

Meeting in Dublin at the weekend, they reaffirmed their commitment to wrapping up a deal on treaty reforms to meet the challenge of expansion eastward, in time for a June 1997 deadline they set in Florence earlier this year.

Restatement of their determination to stick to the timetable will hardly discourage speculation that Franco-German ambitions for political integration are being scaled down, to concentrate minds on preparations for the launch of monetary union in 1999 and to avoid a protracted battle with Britain.

But in public at any rate, John Major's fellow leaders were at pains to insist that the reforms they want entered in the treaty, to be signed in Amsterdam next summer, are anything but cosmetic. Brushing aside the British Prime Minister's latest objections, they moved closer to agreement on incorporating a legal commitment to tackling unemployment in the revised treaty, while the French and German premiers spoke of growing consensus on the need to strengthen the EU's foreign policy and its powers to deal with crime, drugs and terrorism.

Chancellor Helmut Kohl of Germany dismissed as "absurd" suggestions that he was prepared to accept any slackening in the pace of reforms. His remarks last week on a possible "Maastricht 3" negotiation, to come after the current round of treaty talks, were widely interpreted as a signal of his acceptance that the drive to deepen political integration will have to be put on the back burner.

Mr Major listed defence, the common fishing policy, Britain's opt out from the social chapter and measures to tackle unemployment as the areas where Britain could veto progress in the treaty talks. However he confirmed that Britain would continue to play a full part in negotiations about the single currency.

The Germans have won the intellectual battle over the stability pact, originally proposed by Finance Minister, Theo Waigel. Officials are negotiating details of the pact, that will ensure that governments keep a tight rein on their budgets after they join the single currency. The Germans have proposed fines for countries whose deficits exceed the 3 per cent of gross domestic product ceiling set by the Maastricht treaty.

The fines are intended to act as the fiscal equivalent of a nuclear deterrent. The proposed levels are high enough to ensure that members would go all out to stay under the limit.

Although still under debate, there is likely to be a flat rate fine for passing the 3 per cent level, plus a component for every extra percentage point of GDP by which revenues fall short of expenditures, up to a ceiling. The proposed structure is like paying a flat charge for an overdraft, plus a percentage of the amount overdrawn.

For the UK or Italy, the level of fine being discussed is about pounds 700m, plus pounds 700m for every percentage point of GDP by which the government is in the red. For a bigger economy like France it would be approaching pounds 1bn initially plus pounds 1bn for every percentage point of deficit. The figures are equivalent to 0.1 per cent of GDP.

Fines on this scale are likely to be acceptable to potential Emu members as long they are never incurred in practice.

The principle of a stability pact is nevertheless accepted by potential members of the single currency, all of whom recognise the importance of reducing their deficits relative to the size of their economies.