The prospective launch of EMU in 1999 remains uncertain. It is still not clear which countries will be members; and expected political conflicts over the ‘first wave’ membership of the monetary union raise doubts about whether it will actually begin on time.

Such doubts about the timely start of EMU certainly don’t arise from a lack of convergence. Anyone who reads the Maastricht Treaty objectively must conclude that all EU members wishing to join (with the possible exception of Greece) now satisfy the convergence criteria.

For example, the harmonized inflation figures issued by the European Commission show that all EU members (except Greece) satisfy the inflation condition. The same is true of the long-term interest rates condition.

What’s more, a careful reading of the Treaty indicates that the budget deficit criterion too is satisfied everywhere except Greece. According to the Treaty, the budget deficit should be no more than 3% of GDP, ‘unless either the ratio has declined substantially and continuously and reached a level that comes close to 3%; or alternatively, the excess over the reference value is only exceptional’.

There is no question that if the political will exists, the movements in government deficits since 1993 (the low point of the European recession and the high point for deficits) can be interpreted to have ‘declined substantially and continuously and reached a level that comes close to 3%’.

The accompanying graph’s comparison of budget deficits for 1993 and 1997 (as projected by the European Commission) substantiates this claim. Only a blatant misinterpretation of the Treaty allows some governments to maintain that the deficit criterion is not satisfied in 1997.

With public debt, however, a little benevolence may be needed in the interpretation of the Treaty’s text, particularly for countries like Belgium. At the same time, the political consensus, recently reiterated by the German finance minister, is that not much importance should be attached to the debt criterion. If there is sufficient consensus to stretch the Treaty’s wording on the debt criterion, why is it that such consensus cannot be reached on the deficit criterion, despite the fact it can be done without real stretching?

Since virtually all the EU’s members now satisfy the conditions for adopting a single currency in 1997, it is possible, with the Treaty in hand, to make the decision on membership today. The Treaty says that the decision on who qualifies will be taken by the European Council before 1 July 1998. This means that the Council does not have to wait until that date. It could do it today.

Why is this not done? The answer is to be found exclusively in German soul-searching about the desirability of EMU. Germany’s doubts have two dimensions:

• First, a large part of the German public distrusts the whole project: EMU is identified as a monetary regime that will produce inflation and instability, especially if southern European countries like Italy join in.
• Second, the German political establishment has treated the project in a fundamentally ambiguous manner.

The economic benefits of EMU for Germany will be realized mainly if the union includes the southern countries. A large EMU would finally rid Germany of the chronic overvaluations of the Deutsche mark against the southern currencies and the ensuing loss of industrial competitiveness. But while, in economic terms, only a large EMU makes sense for Germany, politically this is the worst possible solution given the latent hostility of the German public to the project.

Germany’s political establishment has surrounded this issue in ambiguity. It has sold EMU to the German public by stressing the economic benefits of the project, which can only be achieved in a maxi-EMU. Yet its tough stance on interpretation of the Maastricht convergence criteria is an implicit promise of a mini-EMU (without Italy and other ‘unreliable’ countries), which cannot provide these benefits.

It has become clear that this game plan is backfiring. Contrary to German expectations, in terms of convergence, the southern Europeans are now performing as well as France and Germany, the twin pillars of a future EMU.

This unexpected development has created a new political situation in Germany. The option of a small EMU is effectively gone. Hence Germany can only choose between a large EMU and postponement of the whole project, an uncomfortable choice. Whether the postponement option is taken depends on the political entrepreneurship of those politicians in Germany aiming to wrestle power from Chancellor Helmut Kohl.

Paul De Grauwe
Professor of Economics, Katholieke Universiteit Leuven and Research Fellow in CEPR’s International Macroeconomics programme