EC sets rules on currency pact

The legal apparatus for the single currency began to take shape yesterday when the European Commission proposed a series of legally binding rules and sanctions to keep prospective members of the new Euro zone in line.

Under the proposed laws, the Commission would assume powers to survey tax and public spending in member states, with a view to ensuring countries keep within public-deficit rules.

Ministers of member states, meeting as the European Council, would then have the power to impose sanctions if a country is seen to step out of line.

Under the proposed law a country would be warned that its fiscal policy was unsatisfactory, and would then have 10 months to put it straight. The maximum fine the country would face would be 0.5 per cent of gross domestic product.

Publication of the draft legal texts is likely to set critics of economic and monetary union on edge. The regulations are the latest evidence that the momentum behind the single currency is building fast. And they will stir new concern in Britain that the single currency will inevitably lead to major diminution in the sovereign powers of member states to decide their own public spending.

The Commission's proposals will primarily affect those countries which do not join the currency in the first phase. The idea, said Yves-Thibault de Silguy, economic commissioner, is to ensure budgetary stability is maintained after the first group of states joins the single currency.

The legislation drawn up yesterday underpins a stability pact under which the countries that remain outside the single currency in the first phase must abide by stricter economic convergence rules. Those countries, which could well include Britain, would be obliged to present their budgetary plans to the European Commission by 1 January, 1999.