Better to be late than softer and weaker

A compromised euro could be dangerous for Britain, whether we join EMU or not The new currency is now likely to emerge in a weaker form that carries huge dangers

France's new finance minister, who has been pictured in Paris Match in white suit, white shoes and white hat, playing a white piano, sounds like a one-man Franco-German alliance. Dominique Strauss-Kahn, 48, is a convinced European, or what the French call a "Maastrichtien". He would not like to go down as the man who played a grand piano while EMU burned. It may surprise many commentators in London, but Mr Strauss- Kahn will inform his fellow EU finance ministers in Luxembourg tomorrow that the euro is safe in his hands.

On the other hand, it was Mr Strauss-Kahn, a professional economist, who invented Lionel Jospin's election-winning Keynesian programme to pump- prime the French economy in order to bolster demand and create more jobs. If that is applied - even partially - it will comprehensively bust France's chance of meeting the Maastricht treaty's criteria for membership of economic and monetary union.

In Bonn, meanwhile, Chancellor Helmut Kohl's government, which has acted as the fiscal policeman of Europe, has been caught with its hand in the biscuit barrel. The Bundesbank's rejection of the government's gold-revaluing scam is humiliating, and the fact that the Kohl government tried it on suggests desperation. Without huge deflationary spending cuts or tax rises, Germany will not reach the key Maastricht criterion this year, which is that the budget deficit should be 3 per cent of GNP or less.

Without France and Germany, EMU has no heart and it has no brain. It may seem that it must be dead, or at least delayed, but no one in the French or German governments is going to admit it - yet. Instead, another bizarre scenario is unfolding.

Each dramatic turn in the past fortnight might have been enough, taken alone, to derail EMU. But the events in Germany and France, back to back, may impose their own solution.

EMU is not threatened with immediate collapse, but with a great temptation. Despite yelps of alarm from Tony Blair, and others, EU governments will be tempted to push ahead with a weaker EMU: to use an aeronautical metaphor - to try to launch a heavier plane, with more passengers and shortened wings.

Do not, however, look for an admission of that fact when EU finance ministers meet in Luxembourg on Monday or when EU heads of government meet in Amsterdam next weekend. Look instead at the hints dropped by the new French government, and the wounded but proud, body language of Mr Kohl. They indicate a timetable for the next nine months before the first real commitments must be made.

DO NOT expect any formal decision to ditch the 3 per cent criterion. Three per cent will be gradually talked to sleep. Note Mr Strauss-Kahn's comment this week that the figure is already "a bit ridiculous". Stress will be placed on the fluid words rather than the harsh figures in the Maastricht treaty. Watch especially for the usefully vague word "convergence". Much will be made of the fact that the French and German economies, and several others besides, are conveniently "converging" on a budget deficit of around 3.5 per cent, which is, after all, only a miserly 0.5 per cent over the criterion.

But if the deficit criterion ceases to be an obstruction, the Club Med countries present a problem. With the guidelines in tatters it becomes harder to resist Spanish and Portuguese membership. Even Italian membership becomes a runner, especially as the Jospin government has made the inclusion of the Club Med, minus Greece, a precondition for France entering EMU next year. The German government, forced by the Bundesbank to make a stand somewhere, may swallow Iberia, but never Italy. That may be the real stuff of an epic Franco-German quarrel; but not yet.

There is an element, here, of EU governments going into what American psychiatrists call "denial". The Bundesbank deplores EMU in this emerging form; so does the French central bank. But they cannot actually stop it.

There is an alternative: the Blair-Major solution, to persuade the EU to delay the project. But the German government, in particular, is convinced that delay means death for EMU.

Mr Kohl believes that a delay would so damage his reputation as the last great Lion of Europe that he would be fatally weakened and the SPD would win next year's election. He argues publicly that if the boulder of EMU is allowed to slip back it will crush the EU itself, unleashing a new era of commercial, even military, conflict in Europe.

The determination of France's new left-wing government to save EMU may seem surprising. It has been interpreted by some as mildly Euro-sceptic, or at least EMU-sceptic. Some members of the cabinet clearly are. But they are in jobs which will have no influence on the EMU debate.

The key EU-related appointments - Mr Strauss-Kahn at finance, Hubert Vedrine at foreign affairs, Pierre Moscovici at European affairs - are convinced Europeans. This means that, at the very least, they see continuing European integration as the best way to extend French influence and preserve French prosperity. Some of the key appointments made by Mr Jospin in his own office are of old Mitterrand and Delors hands, who were present at the birth, or at least the conception of EMU, and the powerful women in the cabinet - Martine Aubry in the Labour ministry, Elisabeth Guigou at Justice and Catherine Trautmann at Culture - are instinctively sympathetic towards the EU.

The French socialists insist that they want only to restore balance to an idea which has become too coldly, obsessively and bureaucratically monetarist in conception. They certainly do not want to take the blame for killing off EMU within weeks of coming to power, as some German politicians would like.

In saving EMU by contemplating a weaker euro, European governments will be cutting through powerful arguments of their own making. The euro was to have been built on firm numbers - however arbitrary - precisely because it could not, like other EU projects, be launched on fine words alone. It was an unprecedented attempt to call into being a new currency capable of taking on the dollar and yen. Some clear test of the commitment of governments was agreed to be necessary. If the two key countries now abandon those tests, the foundation of the euro will be political will-power, and that may not be strong enough.

In fact, a softer euro, a weaker euro may be no bad thing, especially for Germany, whose industry has struggled for years to run up the down elevator of a strong Deutschmark. But not too soft, and not too weak. There is the rub.

THE REACTION of the foreign exchange markets, so far, has been benign. After a couple of days adrift, the French franc recovered strongly on the belief that EMU might still go ahead. It seems that the markets may, for the time being at least, have bought the line that any EMU is preferable to no EMU, because that way chaos lies. But that sentiment could change overnight if the markets decided that the EMU was a sickly creature that could be pushed around for profit. A weak euro may have short-term attractions, but not a weak EMU that causes interest rates to rise when European industry had been promised lower interest rates; and not a euro subject to speculative swirls on the international currency markets.

Mr Blair is right to warn that this method of saving EMU could be dangerous for all concerned, including Britain, whether it belonged or not. In the EU's interest, the most sensible decision would be an orderly delay. Instead, there will be no decision, or a decision to muddle on.

Welcome to Euro reality, Tony.