Logic of Emu has Paris and Bonn at a loss

Germany and France both confronted the tough budgetary logic of monetary union yesterday, but insisted that the goal of a single currency was still attainable. Guessing the likely size of the French budget deficit, if left to its own devices this year, has become a game of sticking the tail on the donkey.

Estimates, from the semi-official to the private, range from 3.4 per cent to 4 per cent, well over the 3 per cent of GDP guideline in the Maastricht Treaty. Economists are almost unanimous in their assessment that Germany's budget deficit will be over 3 per cent this year, and probably in 1998 as well.

In France it was revealed that the former prime minister, Alain Juppe, warned his successor last month that the country's budget deficit could shatter the Emu guideline this year, possibly rising as high as 4 per cent of GDP.

The warning was contained in a confidential letter handed to the new prime minister, Lionel Jospin, when he took over on 2 June. The contents were leaked to the French press this week as part of an almost daily campaign by the Jospin government to prepare other EU governments, the markets, left-wing MPs and public opinion for the tough budgetary choices which lie ahead.

The French Finance Minister, Dominique Strauss-Kahn, has let it be known that France will not hit the 3-per-cent target in 1997 but expects to come close in 1998. He has suggested that action will be taken to bring this year's deficit down to a figure acceptable to other EU countries (possibly 3.4 or 3.5 per cent) but confusion remains on how he will achieve this.

This week he suggested that spending cuts may be necessary, something he previously seemed to rule out. At the same time, he unfroze a pounds 1.1bn contingency fund to allow promised new social spending to go ahead. Various ways of raising new revenue have also been floated and then repudiated or not quite repudiated, including a windfall tax on very profitable businesses and an increased wealth tax.

Bonn is also struggling to hit the target: yesterday it finalised its emergency budget aimed at qualifying for Emu. While the government was forced to acknowledge that it would have to borrow an additional DM18bn (pounds 6bn) to keep the state machinery ticking over till the end of the year, officials still insisted that the Maastricht targets remained in sight.

"We are certain that we will be able strictly to fulfil the Maastricht criteria," said Hermann Otto Solms, leader of the Free Democrats' parliamentary group. His party, the smallest in Chancellor Helmut Kohl's coalition, last night gave the nod of approval to the Finance Minister's supplementary budget, which is due to be adopted by the full Cabinet today.

Theo Waigel, the minister with the unenviable task, had been racking his brain since January to find ways of conjuring up the magic figure prescribed by Maastricht. He still has some tricks up his sleeve: privatisation of state-owned utilities netting DM12,7bn this year, and temporary freezes in public expenditure. Although the Maastricht Treaty forbids such one- off measures, the Finance Minister is likely to argue that those rules, dictated originally by his own government, are mere technicalities.

As the day of reckoning approaches, other excuses are already being invented. The federal government intends to pin the blame for some of the overspending on the Lander, and on unavoidable overshoots in welfare spending.

Today the Cabinet is also due to approve the budget for 1998, promising, as it did last year, a steady fall in outgoings and a reduction of government debt.

Next year Mr Waigel plans to sell the rest of the family silver, bringing him another DM20bn. Despite stagnating revenue, the promised tax cuts will be introduced.

Economists say that will ensure that Bonn will have a serious problem meeting the Maastricht criteria next year, too, though perhaps that will no longer be Mr Waigel's - or Chancellor Kohl's - problem. But at least the new budgets make one concession to the real world: the pretence that unemployment will be halved by the year 2000 is gone.

Even the government's professional optimists expect the number of jobless to be no fewer than 3.9 million then.

Brussels set for a bigger EU

After talks in Brussels, the European Commission looks set to call for Estonia and Slovenia to join Poland, Hungary, the Czech Republic and Cyprus in the next round of EU expansion, writes Sarah Helm.

The proposal is expected to be presented next week when the Commission sets out plans for preparing for enlargement and clearing the way for the first accession talks.

Talks with new members look certain to begin under the British presidency of the Union, starting in January.

Ten countries have applied for membership; to ease the disappointment of states not invited to join in the first wave, the enlargement conference will be maintained as a rolling negotiation, with shadow negotiations established for likely latecomers, say British officials.