WHEN Germany's Chancellor Helmet Kohl recently signalled that the Maastricht Treaty provided room for a flexible interpretation of the single currency criteria many commentators were somewhat taken aback. Member states struggling to meet the criteria may even have taken heart at what could be interpreted as a sign that Bonn, newly sympathetic to their plight, was prepared to meet them half-way.
But Dr Kohl has not gone soft. Flexibility works two ways. If the treaty allows, let us say, for heads of government to interpret a deficit slightly above the 3 per cent of GDP limit as sufficient for eligibility to be part of the euro's launch, it also allows them to say that meeting the Maastricht criteria in full may not be enough to guarantee a place in that select band.
With the European Commission about to, publish figures which show that on current. form ten members may reach the 3 per cent, deficit target for 1997 - and that three others are within reach - Bonn is, sending out strong signals that it will demand evidence, as required by the Treaty, not just off convergence but of the "sustainability and durability" of that convergence.
That will mean, sources in Germany say, looking at not only 1997 performance, but the likely 1998 outcome too. While recognising and supporting the painful efforts of many member states to bring down their deficits, Bonn does not believe that, what one source called, the "accidental" meeting of the criteria in 1997 should be seen as enough if there is no guarantee they will remain below 3 per cent.
Bonn remains resolutely critical of attempts at "window dressing", pulling no punches on the creative accounting involved in the £5 billion France Telecom pensions rebate to the state which has put France back on track. This device got the nod yesterday from the Commission's statistical experts. Bonn, remains unhappy and is deeply sceptical of Italian projections of the effects of its budget package. While Rome is predicting that its budget deficit will fall to 3 per cent in 1997, a poll of independent forecasters puts the likely figure at closer to 4.5 per cent. Time will tell. But, more crucially, economists argue that up to half of one-off measures planned by the government to meet the deadline are not structural in character and simply shift problems into the future.
Some indications towards the sustainability of member state's budgetary policy will be the Commission's long-awaited convergence report due shortly. However, according to reliable sources? the Commission's next economic projections, due to be published shortly, suggest that ten countries - Germany, France, the Benelux countries, Austria, Finland, Denmark, Sweden and Ireland - will make the 3 per cent deficit in 1997. This would give the euro a potentially very significant critical mass for lift-off. With extra effort, Spain, Portugal and Britain may also do so, while Italy and Greece remain no-hopers.
(It is likely that Bonn will take a more sympathetic view of failure to meet the debt criterion of 60 per cent of GDP than that on the deficit, making possible Belgian membership of the euro from day one).
German sabre-rattling on the "sustainability" issue may, however, be seen in a different light - as a most useful weapon in its armoury in negotiations on the Stability Pact, the post-EMU procedure for ensuring continued fiscal discipline among the "ins".
According to this thesis, Dr Kohl, although deeply unhappy about President Chirac's accounting methods, does not want to block initial membership of the euro for France. While he talks loudly now about sustainability, he badly needs to create political cover for any flexibility he eventually shows on the issue.
Bonn does not now expect to see final agreement on the Stability Pact at the Dublin December summit, although only one substantial issue remains to be agreed - the definition of the "exceptional and temporary" circumstances which will not trigger the semi-automatic sanctions procedure against the undisciplined.
Determined to strengthen the "automaticity" of the process Bonn has sought to define an exceptional circumstance as either an unpredictable event like an earthquake, or a recession involving 2 per cent negative growth. German diplomatic sources say they could also just about live with a figure of 1.5 per cent.
Their key concern is to ensure that the circumstances are genuinely exceptional. Looking back over the last 35 years, says the State Secretary at the Ministry for Finance, Dr Jurgen Stark, a study of all 15-member states reveals only 13 cases of a member state facing a recession of greater than 2 per cent negative growth. If the exception was defined simply as "any negative growth" the figure soars to 50 cases.
What would certainly not be acceptable to Bonn is to leave the definition unquantified, the fear being that political considerations and wrangling would then make the sanctions regime inoperable.
There is a certain scepticism in Bonn at the attempt by the Commissioner for Economic Affairs, Mr Yves-Thibault de Silguy a fortnight ago to incorporate a 1.5 per cent figure in its draft text on the Stability Pact. The move was defeated by a large, majority, despite the support of the Commission President, Mr Jacques Santer, and not a few in Brussels would share the Bonn view that Mr de Silguy was simply going through the motions to keep the Germans on side.
The latter are signalling, however, that they will not be soft-soaped on the issue and warn of extended "difficult" discussions.
The issue is crucial from a domestic political point of view. With federal and state elections in 1998 - between the decision on who will be in the first single currency group and its actual launch - the German government could be extremely vulnerable to the criticism that it has gone soft on France and Italy and is playing fast and loose with the potential stability of the euro.
There is considerable nervousness about the possibilities of a populist campaign in defence of the mark and against the euro, despite repeated assurances to the contrary from the opposition Social Democratic Party (SPD), now smarting from 14 years exclusion from power.
Dr Norbert Wieczorek, the SPD chairman of the Bundestag's European Affairs Committee, rules out a party campaign against the euro, but makes it clear that any weakening of a "stringent interpretation" of the Maastricht criteria or toleration of "creative accounting" would be fair targets for the opposition. He warns that the France Telecom approach is simply not in keeping with the spirit of the treaty and says that he is aware of sustained discussions between Paris and Bonn on the issue.
Last year, he points out, when Germany's own deficit went above the Maastricht three per cent it was Bonn which "insisted that it get a blue letter from the Union to show that we are not prepared to fudge the criteria which would only lose the faith of the German population."
An SPD campaign which emphasised its support for the euro and pitched the party as the defender of a strict approach to its launch might not put the euro in danger, but could potentially hurt Dr Kohl badly.
So the chancellor, who is determined to see France in the first euro group, will have to protect his flank with strong assurances that the internal defence mechanisms of the euro are capable of putting manners on wayward Mediterranean countries. A clear public victory against the combined opposition of the EU's other member states on the "automaticity" of sanctions would go a long way to providing him with that shield.
We are heading for a formidable battle of wills.
