US embassy cable - 03FRANKFURT7034

UNCLAS SECTION 01 OF 08 FRANKFURT 007034 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR PDAS RIES, EB, EUR/AGS, AND EUR/ERA 
STATE PASS FEDERAL RESERVE BOARD 
STATE PASS NSC 
TREASURY FOR DAS SOBEL 
TREASURY ALSO FOR ICN COX, STUART 
PARIS ALSO FOR OECD 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EUN 
SUBJECT: Accession Countries And The Euro: Convergence 
Criteria Cause Dilemmas 
 
 
T-IA-F-03-0041 
 
This cable is sensitive but unclassified.  Not/not for 
Internet distribution. 
 
1. (SBU)  Summary:  EU member states and acceding 
countries (ACs) are beginning to face the dilemmas that 
EU economic rules are likely to present them both as 
soon as accession occurs in May 2004.  EU rules require 
ACs to adopt the euro as soon as they fulfill the 
convergence criteria on inflation, public finances, 
exchange rate stability and long-term interest rates. 
 
2. (SBU) Meeting these criteria, however, could be 
problematic for ACs:  Catching up to per capita income 
levels in other EU countries is likely to generate 
relatively higher inflation; forcing inflation down 
could slow down growth; increasing government 
expenditures for infrastructure can bolster long-term 
growth, but they could generate higher annual deficits 
than permitted by the EU rules; and two-year- 
participation in the exchange rate mechanism (ERM II) 
could be a useful "waiting period" to find an 
appropriate equilibrium rate, but also could subject 
AC's to speculative currency attacks and deprive ACs 
flexibility to adapt exchange rates in response to 
structural changes and economic shocks. 
 
3. (SBU)  These dilemmas might be resolved by watering 
down the rules, allowing a broad interpretation, or by 
postponing participation in EMU.  The ACs generally 
prefer the second option; the current EU member states 
the third.  These alternatives have provoked intense 
political discussion and speculation. 
 
4.  (SBU)  A first clear signal of which way the 
official line is headed should be when the European 
Central Bank (ECB) and the European Commission present 
their first convergence reports for the ACs, most 
likely in the fall 2004.  We expect that the rules will 
remain the touchstone of the process, but also note 
that the final decisions on joining the euro are taken 
at the political level.  As the decision was for 
several of the current members of the Euro Group, 
pragmatism is likely to rule the day.  While EU Finance 
Ministers want ACs to have a "solid foundation" for 
their economies that will lend confidence to the euro, 
they also probably wouldn't like to see economic fires 
raging in their neighborhood either.  End summary. 
 
ACs to EMU: No Opting Out 
--------------------------------------------- ------ 
 
5. (SBU)  After signature of the Accession Treaty in 
April 2003 for ten new member states to join the EU on 
May 1, 2004, attention is now turning to the next big 
step: entry of the Accession Countries (ACs) into 
Economic and Monetary Union (EMU).   When the ACs join 
the EU in 2004, they will become "member states with a 
derogation" concerning their participation in EMU. 
This means that they are expected to adopt the euro as 
soon as they fulfill the convergence criteria.  They 
will not have the right to "opt out" as the UK and 
Denmark did through separate protocols. 
 
Nominal Convergence: By the Rule Book 
--------------------------------------------- ----- 
6. (SBU)  In order to join the EMU, ACs need to fulfill 
the convergence criteria set out in the Treaty on 
European Union.  This is referred to as "nominal 
convergence."  The criteria are: 
 
--Achievement of a high degree of price stability, 
apparent from an inflation rate close to that of, at 
most, the three best performing member states; 
 
--Sustainability of government finances apparent by the 
absence of an excessive deficit in accordance with 
Article 106(4) of the Treaty; 
 
--Observance of the normal fluctuation margins provided 
for by the exchange rate mechanism of the European 
Monetary System (EMS) for at least two years with no 
devaluation against the currency of any other member 
state; and 
 
--Durability of convergence achieved by the member 
state and of its participation in the exchange-rate 
mechanism of the EMS being reflected in the long-term 
interest rate levels. 
7. (SBU)  The European Commission and the ECB will 
assess each AC's performance in terms of these criteria 
in so-called convergence reports.  Commission officials 
report that they are "leaning toward" doing the regular 
convergence reports for Sweden before May 2004, then 
prepare convergence reports for the ACs in the fall, 
after they have become EU members.  These officials 
admit that these reports will "have to be clear" on the 
criteria the Commission expects ACs to fulfill to adopt 
the euro.  If the ACs were to join ERM II towards the 
middle or end of 2004, the criteria could be met in 
2006 at the earliest, with data from 2005 and 2006 used 
as a reference year.  Thus, the first ACs could join 
EMU in 2007 or early 2008. 
 
Exchange Rates: A Tricky Business 
--------------------------------- 
8. (SBU)  Interpretation of the exchange rate criterion 
is tricky business.  The Treaty refers to normal 
fluctuations of the EMS.  Protocol No.6 on convergence 
criteria further specifies that the "normal fluctuation 
margins" must be respected "without severe tensions." 
The EMS had a fluctuation band of +/-2.25% that was 
widened to +/- 15% in August 1993.  In 1998 the EMS was 
replaced by ERM II which has a band of +/-15%. 
9. (SBU) The European Monetary Institute's (EMI, the 
predecessor of the ECB) 1998 Convergence Reports 
provides some insight on its interpretation of these 
provisions.  The EMI noted that the widening of the 
band makes interpretation of "normal fluctuation" "less 
than straightforward."  But, it decided to "put 
emphasis" on exchange rates being "close to the central 
rates."  Similarly, "severe tensions" was considered by 
examining deviations from the central parities and 
using indicators of exchange rate volatility and short- 
term interest rate differentials. 
9. (SBU) An ECB official stated that he interprets the 
Treaty as referring to the narrower band of the 
original EMS.  Similarly, a Bundesbank official told us 
that in his view it would not be sufficient for ACs' 
currencies to fluctuate in the wider band of ERM II, 
but should remain more or less within the +/-2.25% 
band.  He also admitted that appreciation over the band 
would be less of a problem than depreciation.  While 
the Commission has not been very clear about its 
interpretation of the Treaty, in May Commissioner 
Solbes let slip that the narrower band is also what he 
would expect from ACs.  Privately Commission experts 
admit that this has been their guiding rule to date. 
 
10. (SBU) Getting the equilibrium exchange rate right 
between the ACs national currency and the euro is 
important for ACs and the ECB.  For the ACs it is a 
question of price competitiveness and long-term growth 
prospects.  For the ECB it could be a question of 
inflation.  Once in the ERM II, intervention at the 
margin to keep a currency in its band is, in principle, 
automatic and unlimited.  Thus, the rate better be 
right for the sake of the ECB the national central 
banks that would be drawn into such intervention or its 
financing potentially increasing money supply The ECB, 
however, can suspend such intervention if it were to 
conflict with its primary objective of price stability. 
Doing so would likely be perceived as a vote of no 
confidence in the exchange rate.  Therefore it is no 
surprise that ECB officials reportedly are working with 
AC central bankers to ascertain the appropriate 
exchange rate at which to fix their currency against 
the euro. 
 
Inflation:  A Question of Catching Up or Being Too 
Tight? 
--------------------------------------------- ------ 
11. (SBU) The inflation criteria present another set of 
problems.  Upward pressure on the price levels in ACs 
is likely to come from macroeconomic factors such as 
higher productivity growth and the associated Balassa- 
Samuelson effect (relatively higher productivity and 
wage growth in tradable goods contributing to upward 
price pressures on non-tradable goods and services and 
their associated wages) as well as from price 
liberalization and deregulation.  These factors lead to 
inflation rates that are likely to temporarily remain 
above the EU average.  Inappropriate macroeconomic and 
wage policies combined with structural weaknesses in 
the ACs economies also exert upward pressure on price 
levels.  Divergent inflation rates between EU member 
countries and ACs can be expected to remain a problem 
until real convergence has been achieved. 
12. (SBU) Given the current very low inflation rates in 
some euro zone members, the inflation criterion would 
require ACs to achieve inflation rates well below 2%. 
The European Commission's spring forecast, for example, 
projects average annual inflation of 1.7% for the euro 
area in 2003 compared to 2.7% in the ACs.  The average 
inflation rate of the "three best performing member 
states" would be 1.1%.  According to the Commission's 
forecast, only Lithuania and Poland would meet that 
target in 2003.  Tight monetary policies needed in the 
other ACs to achieve the inflation target could have a 
negative effect on the ACs' economic growth. 
13. (SBU) The convergence criteria were designed for 
developed, i.e. largely converged countries, and not 
for transition economies.  As ACs have generally 
experienced real currency appreciations of 2-3% 
annually there is a conflict between the inflation 
criterion and the exchange rate stability required in 
ERM II.  Real appreciation takes place either through a 
nominal appreciation of the currency or via relatively 
higher inflation than in the country's main trading 
partners. The convergence criteria do not allow the ACs 
either.  More generally, with full capital mobility and 
only one instrument (interest rates), the central bank 
cannot target the inflation rate and the exchange rate 
simultaneously. 
14. (SBU)  Commission officials point out that 
persistent differences in inflation rates between 
countries are a risk for fixed exchange rate systems. 
They argue that keeping flexible exchange rates for the 
ACs could limit the risk of overheating through the 
option of a nominal appreciation and interest rates 
that are in line with the national economic situation. 
 
Long-Term Interest Rates: Market Expectations 
--------------------------------------------- 
15. (SBU)  ACs have already experienced convergence of 
long-term interest rates towards the levels of EMU 
members.  This may partly be due to market expectations 
that these countries will join EMU soon, resulting in 
investments in ACs bond markets (the so-called 
"convergence play").  However, the drop in interest 
rates is also the result of a considerable volume of 
foreign direct investment, the gradual stabilization of 
domestic price levels and slowing economic growth. 
 
The Fiscal Side:  SGP Rules 
--------------------------- 
 
16. (SBU)  The absence of an excessive deficit 
according to Article 106(4) of the Treaty is defined as 
a general government deficit of no more than 3% of GDP 
and a debt level of no more than 60% of GDP.  These are 
the reference values in the Treaty and the associated 
provisions referred to as the Stability and Growth 
Pact. Most ACs have debt levels below the 60% of GDP 
threshold of the Maastricht Treaty 
 
17. (SBU)  The average general government deficit in 
ACs, however, was 5.3% in 2002, according to Commission 
statistics.  Only Estonia, Lithuania, and Slovenia have 
deficits below the 3% reference value.  In several ACs, 
significant fiscal consolidation would be needed (Czech 
Republic, Hungary, Malta, and Slovakia all had deficits 
over 6% in 2002).  The convergence reports will 
identify most ACs has having "excessive deficits." 
Unlike for EU member states, no sanctions can be 
imposed for having an excessive deficit.  However, it 
also means the ACs can't join the EMU. 
 
18. (SBU)  Fiscal consolidation in order to meet the 
convergence criteria as soon as possible could result 
in lower public investment, particularly in 
infrastructure, which could adversely effect long-term 
growth.  At the same time, reducing deficits might 
become even harder in the near future: requirements 
resulting from EU and NATO membership will lead to 
considerable pressure on spending in the coming years. 
The World Bank quotes estimates that put the overall 
costs of EU entry to the ACs, not exclusively but 
mostly budgetary, at as much as 3.5% of GDP for the 
first three years. 
 
ERM II 
--------- 
18 (SBU)  Growing appreciation that the exchange rate 
requirement might make the road towards adoption of the 
euro rather bumpy has sparked off criticism from market 
participants, academics and policy-makers in the ACs. 
19.  (SBU)  Daniel Gros of the Center for European 
Policy Studies in Brussels calls ERM II "the most 
dangerous exchange rate regime that one can imagine." 
Fixed but adjustable exchange rate regimes are a 
tempting target for speculators, in particular when the 
underlying economic fundamentals are shifting, in his 
opinion.  Originally, capital inflows into the 
accession countries were mainly direct investments, 
either privatization or green-field investment. 
Gradually, portfolio investments are becoming more 
important, e.g. the "convergence play."  These 
investments are short-term and can quickly flow out. 
This increases the risk of exchange rate volatility. 
20. (SBU)  Hungary's recent episode illustrates the 
problem.  The Hungarian forint significantly 
appreciated over the last year due to strong capital 
inflows. The stronger forint hurt exports and, 
consequently, employment.  In January, the National 
Bank of Hungary (NBH) cut interest rates to prevent too 
much portfolio investment and to protect the exchange 
rate.   However, on June 4, the NBH weakened the 
central parity exchange rate by 2.26%.  According to 
ECB officials, this was the result of a deal between 
the Government, which wanted a weaker exchange rate to 
stimulate exports, and the Central Bank, that wanted 
the government to fulfill the deficit convergence 
criteria quickly. 
21. (SBU) The move was poorly communicated and 
misunderstood in the market that was spooked.  The 
considerable depreciation of the forint prompted the 
NBH to increase interest rates again in the course of 
June in order to regain credibility for its anti- 
inflationary stance.  These seesaw changes appear to 
have damaged the NBH's reputation.  The episode also 
illustrates that a central bank only has one instrument 
(interest rates) to aim at two targets: exchange rate 
and inflation. 
 
Debate Regarding Early Adoption of the Euro: 
To Be In or Not To Be In. 
--------------------------------------------- -------- 
22. (SBU) Positions in the debate on early or later 
adoption of the euro are on predictable lines: ACs 
think sooner is better; member states advise to take 
time and do it right.  From the ACs' perspective, 
capital movements present a potentially destabilizing 
force that could disrupt growth.  This, in their view, 
could be avoided by early adoption of the euro, i.e. 
scraping the requirement of a two-year participation in 
ERM II.  Advocates of early euro adoption generally 
also believe that the costs of a fixed exchange rate 
are low for the ACs.  They are mostly small open 
economies and cannot really conduct an independent 
monetary policy anyway.  Entering EMU would give them a 
say in monetary policy decisions. 
 
23. (SBU)  The Euro Group (finance ministers of the EMU 
member countries) takes a very different view.  At its 
March 2003 meeting the Group discussed and reconfirmed 
its position that ACs are expected to first participate 
in ERM II for two years before being able to adopt the 
euro.  At the April 15 informal Ecofin Council, 
ministers confirmed that they would neither accept 
early membership of ACs in ERM II, nor early exit from 
ERM II.  According to the Ecofin approach, a certain 
"waiting period" before the adoption of the euro would 
allow ACs to cope with the shock of full integration 
into the single market and to achieve a high degree of 
nominal convergence. 
24. (SBU) Commission research economists support the 
Euro Group's view for somewhat different reasons.  They 
believe that ACs should wait to join ERM II to avoid an 
influx of capital and lower interest rates that do not 
reflect fundamentals.  Lower interest rates could lead 
to unproductive investments and asset bubbles that 
would adversely affect the longer-term growth 
performance of the ACs. 
25. (SBU) ECB chief economist Otmar Issing argues that 
as an intermediate regime, ERM II provides an anchor to 
expectations, while countries retain the flexibility to 
adjust the parity in case of asymmetric shocks and 
exchange rate pressures.  He concedes, however, this 
option leaves countries exposed to changing conditions 
in global capital markets. 
26. (SBU)  Issing stresses that any decision to join 
ERM II must be consistent with an adequate level of 
nominal and real convergence with the euro area.  This 
would reduce the risk of choosing an inappropriate 
parity for the exchange rate.  In his view, the optimal 
timing of euro adoption may vary considerably between 
ACs.  Moreover, Issing argues that two years' 
participation in the ERM is a minimum and a longer stay 
would permit ACs exchange rates to adapt to differences 
in productivity gains, wage growth and inflation 
relative to the euro area.  Once in EMU, these 
differences would translate in costly changes in 
competitiveness and economic activity, in his view. 
27. (SBU)  Interestingly, the IMF has tiptoed into this 
debate.  In its Article IV consultation on Hungary the 
IMF staff stated that it "sees considerable merit in 
early adoption of the euro, provided fiscal discipline 
and wage restraint are vigorously pursued."  The report 
went on to state that "for Hungary, a small economy 
already highly integrated with the EU, adopting the 
common European currency has clear medium-term 
benefits.  This is particularly true given the 
important role in Hungary of FDI and foreign-owned 
enterprises, and their orientation mainly toward EU 
markets.  The commitment to early EU accession and 
adoption of the euro not only hardens the authorities' 
resolve to deliver the necessary fiscal discipline and 
structural reforms, but it can also serve to strengthen 
the credibility of the disinflation path and, by doing 
so, can also help to minimize short-run costs that 
might arise." 
 
Real convergence: Growth and economic structures 
--------------------------------------------- ---- 
28. (SBU) The Commission and the ECB have been publicly 
discouraging the ACs from entering EMU very quickly, 
recommending that they should first concentrate on 
raising per capita incomes closer to the EU average and 
moving towards comparable economic structures, e.g. 
real convergence. Commissioner Solbes has stressed that 
there are also significant risks associated with a 
premature EMU entry while the process of structural 
change, catching up and fiscal consolidation is not yet 
finished. 
29. (SBU)  Economic theory suggests that an important 
criterion for deciding whether to join a monetary union 
is whether economic cycles in the participating 
countries are pretty much in sync.  This reduces the 
likelihood of asymmetric shocks hitting one or a few 
countries. Those subject to such shocks would have to 
absorb them without using monetary policy or exchange 
rates. 
30. (SBU)  How serious these limitations are for the 
ACs depends on the type of shocks, the degree of 
asymmetry of shocks compared to the euro area, and on 
the speed at which economies adjust to shocks.  Polish 
and Hungarian central bank economists claim that 
economic cycles of the euro area and the ACs are 
basically aligned.  An IMF staff study finds that there 
are still differences in the shocks and the subsequent 
adjustment processes between the euro area and the 
CEECs.  However, several individual CEECs exhibit 
shocks and shock adjustment processes that are fairly 
similar to some euro area countries.  For instance, 
Hungary, Estonia, and Latvia are not significantly 
different from Greece. 
31. (SBU)  An ECB official reports that their research 
continues to show a low correlation between cyclical 
developments in e.g. Poland and the euro area 
countries.  Accordingly, he argued that an independent 
monetary policy would be good for a country like 
Poland. A Bundesbank official took the same view, 
stressing that the ACs recently had much stronger 
growth performance than the EU members, i.e. there is 
no sufficient degrees of cyclical synchronization.  He 
also pointed out that even if this were the case, there 
would be an ongoing need for structural changes in 
relative prices during the catching-up process. 
33. (SBU)  ECB Executive Board Member Padoa-Schioppa 
pointed out that the convergence progress seems to be 
rather slow in most ACs when looking at per capita 
income levels.  On average, per capita income stands at 
about 40% of the EU average as measured using 
purchasing power parities.  However, according to Padoa- 
Schioppa, the most relevant concept of real convergence 
is assessing whether economic structures are in line 
with those of the euro area and whether new entrants 
have set up appropriate institutions and adopted 
international best practices and standards.  He finds 
remarkable progress in that respect in the ACs. 
 
ACs' views 
------------- 
34. (SBU)  Benefits from adoption of the euro entail 
the elimination of exchange rate risk, reduction of 
transaction costs in cross-border business, increased 
trade, lower interest rates due to imported credibility 
and lower vulnerability to external shocks.  For ACs 
with high debt levels and interest rates, such as 
Hungary, euro adoption would imply fiscal savings once 
interest rates are down to the euro zone level. 
Moreover, a commitment to enter the EMU by a time 
certain would intensify pressure on the government to 
pursue sound fiscal policies, signaling investors that 
public finances will be consolidated. 
 
35. (SBU) The Slovenian central bank and government 
have stated that they aim at joining ERM II at the 
beginning of 2005.  Thus the earliest date for the 
adoption of the euro would be 2007.  It would still 
have to bring down its inflation rate (7.5% in 2002), 
but otherwise is not expected to have any problems with 
the convergence criteria. Meeting the criteria should 
be completely unproblematic for the three Baltic states 
(2002 general government deficit and inflation figures, 
respectively were: Estonia, 1.3%, 3.6%; Lativa, 2.5%, 
1.9%; and Lithuania, 1.8% and 0.3%). 
36. (SBU) The NBH and the Hungarian government have 
declared that they intend to adopt the euro as of 
January 1, 2008.  Hungary plans to join ERM II soon 
after accession in 2004.  Observers, however, doubt 
that Hungary will be able to meet the deficit (9.5% in 
2002 projected by the Commission to fall to 4.9% in 
2003) and inflation (5.3% in 2002; new forecast by NBH 
projects it to be 6.5% in 2004) criteria in time for 
the planned entry date.  Poland (deficit 4.2%; 
inflation 1.9% in 2002) is aiming to adopt the euro by 
2008 or 2009. Slovakia (deficit 7.7%; inflation 3.3% in 
2002) has announced that it wants to join EMU as soon 
as possible. 
37. (SBU)  The Czechs (deficit 6.5%; inflation 1.4% in 
2002) have been the only country to indicate that they 
are not in a hurry to join ERM II.  They want to make 
sure that they will be able to meet the other criteria 
after two years of participation.  However, should 
Poland and Hungary move quickly, the Czechs do not want 
to be seen as lagging.  A strategy for the adoption of 
the euro will be established by the end of September 
2003.  The Czech finance ministry and central bank 
prefer to be prepared to adopt the euro by 2007, as 
they believe that financial markets might punish those 
ACs that are not ready when the other countries join 
EMU.  The IMF staff shared that view in its Article IV 
Consultation with Czech authorities.  The Prime 
Minister thinks that 2010 would be more appropriate. 
 
The Politics: Rules as Pretext or Guideposts? 
--------------------------------------------- 
38. (SBU) While it is clear that the EU rules will be 
the touchstone to determine an ACs eligibility to adopt 
the euro, one senior  AC central bank official claimed 
that strict adherence to the rules can be a pretext for 
other reasons against early adoption of the euro.  He 
believes that the ECB is against early entry of the ACs 
because it would make monetary policy as well as ECB 
decision-making on other issues more difficult.  "They 
are just not ready for us." 
39. (SBU) An unspoken concern is that the entry of 
catching-up countries into EMU would result in a looser 
monetary stance.  Although the GDP-weight of the ACs is 
negligible (6% of total euro area)under the new 
rotation system for ECB voting, the ACs weight in 
voting would be proportionately higher than their GDP. 
They could thus have a more significant influence on 
monetary policy decisions (even though the ECB has so 
far reached decisions by consensus and never taken a 
vote).  In theory, however, ECB Council members should 
be guided by considerations regarding the entire euro 
area and not by national interests. 
40. (SBU)  On the other hand, the rules are not 
ironclad, rather serving a guideposts.  ECB 
representatives have hinted that the Treaty leaves some 
scope for political decisions on EMU entry. "We just 
prepare the convergence report: it's just a report." 
Finance Ministers, after discussion the convergence 
reports, would direct the Commission to prepare a 
proposal for a decision by Heads of State or 
Government. 
41. (SBU)  In the application of the rules the 
Commission has stressed that (1) each country will be 
considered on its individual merits; and (2) each 
country will be treated equally.  With respect to the 
first point, a Bundesbank expert doubted whether a 
country-by-country decision on EMU entry would take 
place.  Rather he expects that there may be a group of 
more advanced countries, mainly the Baltics, joining 
early and another group following later.  He also 
expects that political pressures will be exerted by the 
ACs to gain immediate entry into ERM II.  To some ACs 
this would be the beginning of a two-year process 
leading directly to adoption of the euro. 
42. (SBU)  On the second point of equal treatment, 
neither Finland nor Italy spent two full years in ERM 
II before they joined EMU.  Moreover, while the UK has 
never agreed to join the ERM II, there is speculation 
that it would nevertheless be admitted to EMU if it 
wished to enter.  Sweden is a more immediate case in 
point.  The Commission stated in its bi-annual report 
on Sweden that "exchange rate stability during a period 
of nonparticipation before entering the ERM II can be 
taken into account".  Thus, previous experience 
suggests there is some leeway for ACs to be admitted to 
EMU without participating in ERM for full two years. 
43. (SBU) Similarly, Italy and Belgium did not meet the 
debt criteria before being allowed entry and some 
others may have used "creative accounting" to get their 
books in shape to meet the entry criteria. All these 
examples of interpreting rules are likely to be well- 
known to ACs. 
 
Comment 
------- 
44. (SBU)  The potential gains of adopting the euro 
will be weighed against the potential risks, in 
particular of a real appreciation, which could put a 
brake on growth.  The ACs themselves seem to understand 
that monetary, exchange-rate and fiscal discipline 
imposed by EMU can involve serious constraints, 
impeding growth. 
45. (SBU) At the end of the day, the decision on EMU 
participation will be based on the rules and numbers, 
with a healthy dose of political considerations. 
However, watering down the convergence criteria for the 
ACs could harm the euro's reputation as a stable 
currency and would do the ACs no justice.  Abiding by 
the rules and risking currency troubles that could be 
attributable, at least in part, to those rules also 
would not be a good advertisement for the euro.  As in 
the past, some pragmatism could be used to reward those 
ACs that have demonstrated a commitment to move 
aggressively toward, if not actually meet, the Treaty 
criteria. End comment. 
46. (U) This cable coordinated with Embassies Berlin, 
Budapest, Warsaw, Prague, Ljubljana, and USEU Brussels. 
 
47. (U)POC: Claudia Ohly, Treasury Office, e-mail 
  OhlyC@state.gov; tel. 49-(69)-7535-2367, fax 49-(69)- 
  7535-2238. 
 
Bodde