When I became President of the ECOFIN Council in July I set out my priorities in the economic and monetary union area in accordance with the mandates given to ECOFIN by the Madrid and Florence European Councils. Briefly, these require ECOFIN and, in their respective fields of competence, the European Commission and the European Monetary Institute to present conclusions to the Dublin European Council in December 1996 showing further substantive progress towards ensuring a smooth transition to economic and monetary union. Three areas are involved.
The first concerns strengthening budgetary discipline in stage three of economic and monetary union among member states that adopt the euro. This work follows from the treaty provisions in relation to the avoidance of excessive deficits, and the specific proposals made by Germany last year for a stability pact to operate among member states in economic and monetary union. The second involves study of the range of issues, particularly in the monetary policy area, raised by the fact that not all member states will adopt the euro from the outset. The third is the legal framework for the use of the euro.
Very satisfactory progress has been made on all three areas so far during our Presidency. In Dublin in September I hosted an informal meeting of EU Finance Ministers and Central Bank Governors to review progress and to chart the course to the December European Council. This meeting ensured that we are well on our way to achieving our Presidency objectives.
On the stability pact, Ministers endorsed the idea that member states in economic and monetary union will be obliged to submit stability programmes outlining their plans for keeping their public finances in order so that their general government deficit will be kept below the treaty reference value of 3 per cent of GDP over the course of a normal business cycle. There was also broad agreement that member states not in economic and monetary union should submit convergence programmes showing a commitment to manage their public finances in accordance with the principle of convergence. All member states agreed with the idea of an early warning system to help prevent excessive deficits arising.
Article 104c of the Treaty on European Union provides for sanctions to be imposed, including the imposition of fines, if a member state fails to take effective action to remedy an excessive deficit. At Dublin, there was a consensus that as a general rule when sanctions are first imposed, the member state involved should make a noninterest-bearing deposit; and that after two years a deposit should be converted into a fine of the same amount if the deficit continues to be excessive.
Finally, there was agreement that the pecuniary sanctions provided for in the treaty should have both fixed and variable components and should be of a magnitude sufficient to discourage excessive deficits. Further work is being carried out on the scale of sanctions.
On the second area, the Dublin informal Council also made progress on the objectives and main features of a new exchange rate mechanism. There was a consensus that the central rates of currencies in the new ERM should be set by reference to the euro only, to reflect both its anchor rule and the goal of convergence to the euro area. We also called for work to be done on the issue of strengthened surveillance of exchange rate policies of member states outside the euro area, with a view to making more effective the obligation in article 109m of the treaty for member states to treat their exchange rate policies as a matter of common interest. Finally, there was agreement at Dublin on the need for certain legislation on the legal framework for the introduction of the euro to be produced as a matter of urgency.
The progress made under the Irish Presidency so far was reflected last month when the Commission adopted legislative proposals on the stability pact and on the legal framework for the introduction of the euro, as well as a draft communication to Council on the relationship between participating and non-participating member sates. As for the rest of our Presidency, we will be chairing a working group on the draft legal framework for the introduction of the euro with a view to as much agreement as possible being reached on it in advance of the European Council in Dublin in December. Work is also continuing within the Monetary Committee, on the Commission's legislative proposals on the stability pact.
Early next month ECOFIN will finalise reports for presentation to the European Council which will show substantive progress on the three areas I have outlined. Many key elements of the stability pact and of the legal framework for the introduction of the euro have been agreed and I expect further progress to be made before the end of the year. The main parameters of the new ERM are almost settled, although the details cannot of course be finalised until the European Central Bank is set up in 1998. Work on other aspects of the relationship between participating and non-participating member states is ongoing in the context of improving multilateral surveillance. The work on the legal framework for the euro is at an advanced stage.
I should not neglect to mention in the context of our Presidency role that, although there is now no likelihood of a decision in 1996 to proceed to economic and monetary union in 1997, there is still a Treaty procedure under which the European Council must decide, before 31 December 1996, whether a majority of member states fulfil the necessary conditions for the adoption of a single currency, whether it is appropriate to enter the third stage of economic and monetary union and, if so, to set the date for the beginning of the third stage.
The European Council has of course already decided that 1 January 1999 will be the starting date for economic and monetary union, so the outcome of this procedure is already clear. The procedure must nevertheless be carried out. Our aim is that the Dublin European Council will reaffirm the 1 January 1999 commencement date for economic and monetary union and drive home the message that the move to economic and monetary union on that date is irreversible.