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EMU adds to financial markets' uncertainty

If John Major fails to win the convincing victory he needs in today's leadership election, the most important reason will be European monetary union. A second round will be dominated by the issue that continues to tear the Tory party apart. The contortions of the pro-European Michael Heseltine will be fascinating to watch as he bids for votes from the right.

Unless the Conservatives stage a near-miraculous recovery at the polls, however, all this will be largely irrelevant. On present form, a Labour government will have to make the fateful decision on whether or not to participate in monetary union in 1999. Yet as the Conservatives wheel ever-closer to rejecting even the "opt-out" compromise, the implications of this gathering head of steam against EMU need to be taken on board by financial markets.

Can Britain afford to stand aside if others decide to forge ahead with monetary union? Lord Lawson told a conference of top bankers yesterday that "we can and must" do just that. Basing his position on constitutional grounds - that monetary union and political union "must stand or fall together" - he said Britain could afford to go it alone. In particular, there was no reason why the City should lose its position as the financial capital of Europe and as one of the three great financial centres of the world.

By contrast, a former governor of the Bank of England, Lord Kingsdown, warned against the dangers of assuming that EMU would not happen. That was the mistake Britain had made 40 years ago in Messina before the birth of the European Community. Britain would face a severe competitive handicap if we dithered on the sidelines hoping that EMU would go away.

The argument will clearly run and run. While most still argue about the big issue, some already have their minds on the nitty gritty, which can make highly alarming reading. Speaking at the same conference, Richard Allen of Apacs, the payment clearing association, said the minimum cost of switching payments systems to a common currency will be pounds 914m. This massive enterprise will take at least three years and must be based upon "irrevocable political will".

That is something that doesn't seem thick on the ground at the moment. EMU is billed as the project to end the uncertainties that attend floating exchange rates, the crowning glory of European integration. In practice it is injecting a whole new area of uncertainty into financial markets.