Economics Update (April-June 1997)

France Will Be Ready for EMU,
Says French Ambassador

F rance will be ready to join the European Economic and Monetary Union (EMU) in 1999, says François Bujon de l'Estang, French Ambassador to the United States, speaking recently to a gathering of local business leaders at the Atlanta Fed. Bujon de l'Estang made his remarks before the recent French elections, which brought about a change of government there.

Changeover to the Euro in 1999

The changeover to the euro, Bujon de l'Estang noted, will begin on Jan. 1, 1999, with wholesale markets. The European System of Central Banks (ESCB) will define and conduct monetary and exchange rate policies in euros.

An important factor for the success of the changeover, he pointed out, is the commitment by governments to issue new debt exclusively in euros after January 1999. The ambassador stated that the French government has shown an even stronger commitment in its announcement that the existing debt stock will also be redenominated in euros in early 1999. The changeover for the retail market will be completed no later than July 2002.

Convergence Criteria for Joining the EMU

Bujon de l'Estang defended the convergence criteria a European country must meet if it wants to join the EMU. While the rationale for these criteria has long been debated, in the ambassador's view these are "reasonable requirements to avoid destabilizing effects of potential imbalances."

  • The maximum rate for inflation is 1.5 percentage points above the average inflation rate in the three member states with the lowest inflation rates.
  • The maximum level for long-term interest rates is 2 percentage points above the average in the three member states with the lowest inflation rates.
  • The general government deficit must be below 3 percent of GDP.
  • The public debt must be below 60 percent of GDP.
  • The exchange rate must remain within the European Monetary System's normal fluctuation bands for the previous two years without any devaluation.
The ambassador stated that France currently meets four out of the five criteria, and the French government is committed to fulfilling the fifth criterion, which relates to the deficit. The government announced in 1995 a schedule for deficit reduction: 5 percent of GDP for 1995, 4 percent for 1996 and 3 percent for 1997; so far, the government has already accomplished two-thirds of the task. For France, he said, "what is at stake is not only the compliance to a criterion but also securing a sustainable fiscal position in the medium term." Bujon de l'Estang expressed optimism that France will join from the start, as will Germany.

'Ins' and 'Outs'

There is no "club" allowing privileged nations exclusive membership in EMU, Bujon de l'Estang stated. "The list of countries participating in the monetary union on Jan. 1, 1999, will be drawn up by spring 1998. In principle, all countries in the European Union qualify for joining the single currency; yet some of them will probably fail to satisfy the membership criteria and therefore will not be entitled to join at once." He dismissed media reports that some northern countries are reluctant to accept Mediterranean countries that may want to join in 1999.

Bujon de l'Estang continued, "The very definition of the criteria proves that the Monetary Union is based on common, clear and objective rules that apply to all countries. Some Mediterranean countries have made huge efforts for which they must be congratulated. Whether these efforts will be sufficient to qualify next year, nobody knows. But I cannot see why these countries could be ruled out a priori," he stated.

Decisions taken by the European Council in Dublin, Ireland, in December 1996 clarified what will govern the monetary relations between those that join and those that do not, he pointed out. "The new exchange rate mechanism will promote stability and cohesion. It will be anchored in the euro and will enable the entire European Union to benefit from its stability. Participation in this mechanism will remain one of the criteria for joining the Union. It will help 'outs' to gain the confidence of the markets and to have lower interest rates, which will in turn speed up the consolidation of their public finances."

The Stability and Growth Council

The ambassador went on to defend the French proposal for a Stability and Growth Council, which some observers have interpreted incorrectly in his view as intended to counteract the influence of the European Central Bank (ECB). Bujon de l'Estang emphasized that the independence of the European Central Bank is not at issue in the proposal. "What is more," he noted, "(the ECB's independence) is protected under the Treaty of Maastricht."

Concerning the French proposal's aims, he emphasized the need for a body to meet informally to monitor developments and allow for regular discussion of the macroeconomic environment. Bujon de l'Estang believes that under the proposal "the member states will notably preserve unimpaired sovereign power in budgetary and fiscal matters, creating the need for a forum where these issues can be discussed and coordinated." He noted that "the idea of the Stability and Growth Council has once more been endorsed by Germany during the latest French-German Council on March 12, 1997."

The ambassador also referenced the international consequences of the euro, noting that the first important conference on this topic was held in March of this year. Bujon de l'Estang expressed encouragement that there seems to be "a real convergence of views from both sides of the Atlantic on the necessity to maintain price stability and to reduce public deficits," and he voiced confidence about the future of trans-Atlantic economic policy cooperation.

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