Landslide fails to shake EMU

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The Independent Online
Labour's landslide victory in the British general election was largely shrugged aside yesterday by our panel of City economists delving into the prospects for economic and monetary union. Most said expectations of a Labour government had been factored in by the markets.

Julian Jessop of Nikko Europe said: "My gut feel is it doesn't matter because whoever won there would have to be a referendum on the project and the British public is still against it."

Gwyn Hacche of James Capel said Labour's big majority probably increased the chances of the UK going in, possibly not in the first wave but immediately after. That should make gilts attractive against other government bonds, he suggested.

The travails of the suddenly weaker punt, which forced the Irish to raise their interest rates this week, were also largely discounted by our City scribblers. The problems of the currency highlighted the divergent pressures on countries struggling to meet the convergence criteria, while the devaluation of the currency took some of the pressure of the weak lira. But the economists suggested that the fate of the punt was largely peripheral to the main event.

By general agreement, a more important influence on the eventual outcome was the French election. While the enthusiasm of the French socialists for EMU matches that of the governing RPR coalition, like their social democratic counterparts in Germany, they are happier to accept a looser interpretation of the convergence criteria .

If this more liberal view prevailed, it would allow in more countries, which, according to Philip Chitty of ABN Amro Hoare Govett, would suit Lionel Jospin, leader of the socialists, as it would dilute the influence of the Germans. However, Allison Cottrell of Paine Webber, says Chancellor Kohl would be unable to accept the conditions attached to membership, threatening the whole project.

By contrast the Gaullists are much nearer the Germans, being keener on a stricter interpretation of the criteria and a narrower inner core of initial members of the single currency.

How the balance of power between these two views works out once the votes are cast will clearly guide France's view of EMU as it goes into next year. The optimists are in the ascendant, believing that the ruling coalition will be returned again.

In mid-May the Germans will publish their latest tax revenue figures, which will give clues as to how well the country is meeting the 3 per cent budget deficit target. On the May 25 comes the first round of French election. Any signs of the socialists doing well are likely to be taken as a bad omen for EMU by the markets.

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