EMU will miss 1999 deadline

Scramble to be ready for starting date could undermine the euro, warns IMF chief

The strongest warning yet that European Monetary Union will be delayed has been delivered by Michel Camdessus, president of the International Monetary Fund.

The influential French financier chose German finance minister Theo Waigel's Christian Social Union (CSU) party conference to suggest that it is better to delay EMU beyond its 1 January 1999 start date than to rush into a new euro-currency with inherent instability.

"We must not be obsessed by a given starting date," Camdessus said. "The euro should start on an unchallenged basis. 1997 will be the year of truth for EMU. A delay would not be a catastrophe but a serious setback."

One central banking source said it was not a question of whether a delay would be announced, but when.

The Bank of England would make no comment on Camdessus's comments. But when asked whether they could be interpreted as a hint that a delay was impending a spokesman said: "You could easily draw that conclusion."

Camdessus made it clear that while he had doubts about the wisdom of creating a new euro-currency in 1999 he remained a firm supporter of EMU's benefits.

"EMU is an outstanding factor for stability, economic strength and growth, not only in Europe but in the world," he said.

He made it clear that the stability pact agreed by EU member countries to ensure fiscal responsibility across the union once a single currency was implemented needed to be strengthened: "I propose that the Ecofin ministers make efforts to agree on rules for fiscal transparency to ensure that the same exemplary methods in the public sector will be implemented for all EU countries."

He argued that for the new euro to become a key currency in the international currency system, sound fiscal and structural policies will have to be supported. It was not enough, he said, to have a strong euro and macroeconomic stability. Structural reform was also required.

There is speculation in central banking circles that Camdessus was preparing the ground for a formal announcement that EMU will be delayed.

Another central banking source said that if there was to be a delay it should be announced as a matter of urgency. He pointed to the artificial economic strategies being pursued by some countries in order to meet the Maastricht Treaty's convergence criteria which dictate which nations can qualify to become EMU founding members. Economists are uneasy at the lengths some countries have gone to ensure compliance with the Maastricht convergence criteria this year.

Referring to Spain and Italy, (the "Club Med" countries), Colin Warren at Tokai Bank Europe said: "Whilst all manner of fudges may be used to massage numbers through this year, without more fundamental change it is doubtful whether either country could sustain deficit and inflation levels within Maastricht limits. Unless they put their economic houses in order, their potential to destabilise the entire EMU project will be great."

France and Belgium have also used ingenious devices to ensure they can meet the Maastricht criteria. The biggest worry is over the ability of Germany itself to meet the criteria. Economic data released last week suggested that the public sector deficit reached 3.9 per cent of GDP last year against the 3 per cent target set by the Maastricht Treaty. With unemployment rising, sluggish growth and a need for unpopular structural reform, economists are questioning whether Germany would either want or be able to join EMU on 1 January 1999.