EU's poor relations face cuts in run-up to monetary union

SARAH HELM

Brussels

Poor European countries which do not control public spending in the run-up to monetary union will be punished by cuts in support funding from Brussels.

Richer European Union countries voted yesterday to take a hard line with Greece, Portugal and Spain for failing to reduce budget deficits and debts fast enough under the rules agreed for joining a single monetary system.

If their excessive deficits are not brought into line by 1996, payments from a pounds 13.3bn fund to support infrastructure projects will be blocked. The decision, taken by finance ministers in Brussels, is the latest indication that the going is getting tough as the realities of achieving monetary union emerge. Spain, which has just taken over the EU presidency, fought hard to prevent the attack on the "cohesion fund". But it is Greece, which is projected to have a 10-per-cent budget deficit in 1996, that will be hardest hit.

"The majority voted to make it quite clear that there are some real teeth in this procedure," Kenneth Clarke, the Chancellor, told a news conference. In order to join the single currency, EU nations have to cut their deficits to within 3 per cent of gross domestic product. They must also reduce inflation and national debt. So far, only Germany, Ireland and Luxembourg meet the criteria.

Richer countries are also worried about unfavourable side-effects of monetary union. Yesterday discussion began about how those countries that join the single currency will relate to those that stay outside.

France, in particular, fears that its poorer neighbours, such as Italy, will steal a trading advantage if they remain outside EMU and deflate their currencies. France is worried about the import of cheap cars from Italy, for example, which would compete unfairly with the same cars sold in France.

Britain has backed a detailed study into the question of how an inner and outer group would co-exist. Yesterday Mr Clarke repeated the Government's position that many issues remain to be resolved before Britain would decide to enter EMU, saying the study on the links with non-EMU countries could take some time and will not be ready in time for the Madrid summit at the end of the year.