Drama in France and Germany boosts chances of EMU delay

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The Independent Online
The dramatic events in France and Germany this week make it less likely that a single currency will start on time in 1999, according to the Independent's weekly poll of economists.

The nine-strong panel says that the probability of EMU starting on schedule has fallen from 69 to 60.4 per cent in the last week. The probability of a delay, meanwhile, has risen from 23 to 30.6 per cent.

Michael Lewis, of Deutsche Morgan Grenfell, described the probability of EMU going ahead on time as "all or nothing now". Germany, he said, faced a choice between delay, and the flight to the mark that would follow, or pressing ahead and accepting a softer value for the euro. Faced with the damage a stronger mark would cause its exporting industry, he believed Germany would settle for the current timetable.

There has been no week in the history of the single currency project that delivered more drama than the past seven days. First, the French Socialists made their dramatic gains in the first round of the election last weekend, making this Sunday's results more important than anyone imagined when President Jacques Chirac first called the election.

Then the Bundesbank launched its "nuclear attack" on the German government, accusing Theo Waigel, the Finance Minister of accountancy more creative than the Italian government's. Anybody who knows what the Germans think of Italian fiscal uprightness will know what a calculated insult that was. Mr Waigel is now likely to face a confidence motion.

Yet the uproar has had surprisingly little effect on the financial markets. The reason, according to The Independent's panel, is that markets are in two minds about whether the events make it more likely that EMU will go ahead with a very broad membership, including Italy, or more likely that it will not happen at all.

"The events have pushed the markets towards the two extremes, all or nothing. The next decisive event will tip it one way or the other," said Julian Jessop at Nikko Europe.

He said the early election in France and the German government's gold revaluation plan had been huge errors of judgement. "The political commitment to the project seems as strong as it ever was. But I am enjoying the discomfort of all those people who were saying it was a done deal because the political will was there. That showed such a contempt for democracy," he said.

Robert Lind at ABN Amro predicted a prolonged period of volatility. "The response in the market has not been as catastrophic as you might have expected, but it is all very messy."

Martin Brookes at Goldman Sachs agreed. "It is difficult to see a clear path through the next six months. The uncertainty has increased dramatically," he said.

The French election result, the Bundesbank's reaction to the German government's intention to plough on with the revaluation of its gold reserves, and the Inter-governmental Conference in mid-June all present potential flashpoints.

By Monday morning a little of the mist will have cleared after the second round of the French election at the weekend.