Big Deficit in Germany Raises Odds for 'Euro' European Union May Ease Criteria for Common Currency

Article excerpt

The star pupil in the class on "contemporary European fiscal management" - Germany - has just been publicly rebuked by the teacher for not getting his homework done.

Paradoxically, that may make it easier for others in the class to pass the course. And thus it could mean that Europeans are more likely to have a common currency, the Euro, jingling in their pockets or folded in their purses in a few years.

The rebuke came from the European Union. It blasted Germany for letting its budget deficit balloon last year to 3.6 percent of gross domestic product (GDP), the nation's output of goods and services. That is up from 2.5 percent the year before. For 1996, EU economists in Brussels are projecting that Germany will have an even more unacceptable budget gap of 3.9 percent.

At this rate, Germany is unlikely to meet the 3 percent deficit allowable under the "convergence criteria" set forth by the Maastricht Treaty on European currency union. Germany is also over, by a little less than two percentage points, the 60 percent limit on public debt as a proportion of GDP.

An embarrassment

It is an embarrassment for Chancellor Helmut Kohl, who, remembering his own school days, has remarked, "When the No. 1 in the class got bad grades, that made the others happy."

Currency policy is an arcane, technical subject, and an unlikely path into the history books. But for the chancellor, a common currency is fundamental to the political integration he sees as vital for Europe. It is "a matter of war and peace," he has said, to some snickering from those who thought he was being overdramatic.

Thus, the prospect of delay in the launch of the new currency, now set for 1999, is especially galling for him. Yet, strangely enough, over the last few weeks a consensus seems to have developed within the business and financial communities that the Euro will be launched on time. For one thing, Germany and France have expended a great deal of political capital to make it happen. And financial markets see it as making economic sense.

On-time launch is likely to take some flexible interpretation of the convergence criteria. But with Germany - which has been the key backer of strict criteria to ensure currency stability - in fiscal straits, such flexibility may be politically possible as it wouldn't be otherwise. …