Criteria for EMU under threat from slowdown in growth

THIS week the former EU Commission president, Mr Jacques Delors, joined the ranks of the Euro pessimists. He argued at a Commission conference in Brussels that the falling away of economic growth in the main European economies imperils the EMU project of which he one of the main authors.

Mr Delors lamented the wave of doubt about the merits of EMU that has swept over Europe in recent weeks, barely a month after the Madrid summit decided to christen the new currency the euro.

He reiterated his call for an "economic government" for Europe to accompany EMU.

But he spoke after EU finance ministers had rejected a suggestion from his successor, Mr Jacques Santer, that extra funding should he provided for the trans European networks. These were the backbone of the Delors White Paper on Growth, Competitiveness and Employment adopted in December 1992 as a stimulus for a sluggish European economy.

They concluded, as have Group of Seven and Commission economists, that we are not facing into a recession, but rather a pause in growth. Be sides, such Keynesian pump priming is considered inappropriate, even passe. Better to rely on reduced interest rates, greater labour market flexibility, and reduced welfare expenditure, so the argument goes.

There is no denying the collapse of confidence among businesses and consumers, however, charted in the latest Commission survey. There was some embarrassment in Brussels when journalists pointed out that another survey, which showed most EU citizens enthusiastic but ill informed about the single currency, had also shown that a majority of them believe it will cause slower growth and higher unemployment.

The president of the European Monetary Institute over seeing the transition to EMU, Mr Alexandre Lamfalussy, told the Brussels conference that the classical signs of a cyclical recession are absent. Profits and investment are holding up and there is little sign of growing indebtedness or overheating.

HIS remarks sit uneasily with the wave of concern about low rates of growth and consequent unemployment articulated by business and political leaders in recent weeks. Some very significant figures have now joined the debate.

They include the Spanish Foreign Minister, Mr Carlos Westendorp, who suggested this week that the old EC/EU technique of stopping the clock" could be used to allow at least one of three strategic big states - Spain, Italy or Britain to qualify for membership.

Another key figure, Mr Valery Giscard d'Estaing, joined the fray in Brussels. He suggested that the Maastricht Treaty convergence criteria could be flexibly interpreted to facilitate France and Germany as they cope with recessionary conditions that inevitably make it more difficult to meet targets on borrowing and indebtedness.

These are the problems that arise from the obsession with "hitting cyclically unadjusted fiscal targets in an arbitrarily chosen year", as the Financial Times put it. Further fiscal tightening in an economic downturn is clearly deflationary. It is also more difficult as unemployment makes greater demands on welfare expenditure in the main European economies.

The results can clearly be seen in the latest economic statistics from Germany, where government borrowing turned out at 3.6 per cent in 1995, outside the Maastricht 3.6 per cent criterion and where, growth this year is projected at 1.5 per cent; and from France, where growth will be lower, and borrowing even higher.

In this case both these states, the core group, would not comply with the criteria, leaving Luxembourg and Ireland as the only EU economies that currently would do so. No wonder there is a wave of pessimism and increasingly open disagreements among cabinet, ministers in Paris and Bonn.

The FT warns British Eurosceptics against schadenfreude, taking pleasure in another person's pain, since much of that pain will be their own if a real, recession develops.

This week has seen the beginning of a discussion on supplementary or alternative approaches to handling these dilemmas of economic co ordination and policy. In Germany government, employers and trade unions reached agreement on a major initiative to halve unemployment by the end of the century. Measures to be taken include reduced social security contributions, pay restraint and reduced overtime.

The plan is explicitly designed to avoid the kind of social conflicts that erupted in France before Christmas. Trade unions there are threatening to hold protests again next month as the Juppe government perseveres with plans to overhaul the social welfare system.

ONE way or another Mr Juppe looks vulnerable to attack. His, most likely replacement as prime minister would be the speaker of the National Assembly, Mr Philippe Seguin, who yesterday called for a reexamination of the whole Maastricht approach, of which he is one of France's leading sceptics. He has supported a sharp reduction of French interest rates as a means of creating jobs. The Germans have been floating the idea of a joint Franco German initiative on jobs in parallel to their national effort.

There has been too little discussion of a co ordinated macro economic response. A pan European Keynesian package has been put forward in an interesting correspondence between Ken Coates, rapporteur of the European Parliament's Temporary Committee on Employment, and senior commissioners.

Mr Coates has argued that without the kind of substantial capital package originally envisaged when the White Paper was being drafted the criteria would create unemployment. Less than half this sum has actually been brought into play, with the result that the convergence criteria are all the more deflationary. His message that they will remain so without a realistic cohesion package should gain a wider hearing after this month's accumulation of events.