French budget on target for EMU

The budget measures unveiled at the start of the week to keep France within Maastricht deficit limits seem to have sharply increased confidence in the great monetary union project.

Swingeing corporate tax increases and cuts in spending look like squeezing the French economy to within a few tenths of a point of the deficit target of 3 per cent this year. But the money markets, now clearly banking on a broad EMU coming in on time in 1999, voted with their feet, driving the mark yet lower against safe-haven currencies, notably the dollar and sterling.

The mark has lost close to 5 pfennigs against the US currency over the past week, taking its depreciation since the start of the year to 19 per cent.

Even so, Martin Brookes of Goldman Sachs reckons the market has factored in an "overly optimistic" 86 per cent probability of EMU meeting the deadline. It is a relative scepticism shared by many of our panel.

But our economists diverge over where the mark will go from here. Several pointed to hints the Bundesbank will raise rates to defend it, but Stephen King of James Capel said their research suggested a DM2 dollar if Spain and Italy are included in the first phase of EMU.