It has always been impossible to predict how the grand European project would turn out. It was as if a thick veil of mist hung between now and 1 January 1999. Investors have tended not to think the unthinkable and restricted their speculation to who would be in, who out.
With the German row, the veil is still in place, but the uncertainties are bigger. Will it happen at all? Will it be delayed? Will it go ahead with Uncle Tom Cobbleigh - Italy, that is - and all? Beyond that, how big a political crisis at home do the German and French governments now face? With questions like this unanswered and unanswerable, no wonder everybody has been piling into the Swiss franc.
According to David Marsh, the Robert Fleming European analyst with extensive knowledge of the Bundesbank, this is the most serious disagreement between the central bank and the government since the Korean war.
If Chancellor Kohl defies the bankers' ruling to push through a revaluation of its gold reserves, there can be little doubt the public would be on the Bundesbank's side. It could thwart Mr Kohl's hopes of re-election next year.
Meanwhile, this weekend will bring the outcome of the French elections. President Chirac's gamble of counting on a victory to give him a clear run up to the start of the single currency has failed.
The two events of this week combined must have increased the probability that EMU will not happen substantially. This is bad news for Italian and Spanish bonds, which are likely to reverse their convergence towards German yields. It might well be good for German bonds if the danger of substituting a weaker euro for the mark has receded. It is also likely to boost the pound and gilts to the extent that they are seen as a haven from turbulence as opposed to a portfolio alternative to a weak euro.
The markets made some of these connections yesterday, but reaction was surprisingly muted. Thinking the unthinkable takes a bit of getting used to.Reuse content