In the middle of the week, dealers started selling Italian and Spanish bonds with abandon, and the lira reached its weakest point since it rejoined the exchange rate mechanism last November.
Robert Lind of ABN Amro said: "We had a taste of what is likely to happen if we hear a serious statement about a delay to EMU."
But the drama ebbed towards the end of the week as traders focused their attention on events in the US and the views of Alan Greenspan, the Federal Reserve chairman. Mr Lind said: "Had Mr Greenspan's comments not distracted the markets, the lira would have been in serious trouble."
As a result, our graph shows that the gap between Germany and Italy fell slightly compared to the end of last week, as markets calmed down again. In fact the closing gap by Friday between Italian and German bonds does not entirely reflect EMU concerns. According to Richard Reid of UBS, investors are shifting out of bonds everywhere. As a result German and Italian bonds both did badly last week.
The trigger for the mid-week turbulence was a spate of candid and contradictory statements about EMU from German politicians, bankers and officials.
Martin Brookes of Goldman Sachs said: "There hasn't been any economic news to justify the reaction in the markets. Instead the markets have been reacting to sentiment. It has suddenly become acceptable in Germany to discuss delaying EMU and that has upset traders."
Klaus-Dieter Kuehbacher, a Bundesbank council member, caused the biggest stir of the week when he said he thought Germany would not make the Maastricht borrowing criteria, and that it was better to delay than miss the criteria. His remarks followed closely on a statement by the German Finance Minister Theo Waigel to his European colleagues on Monday, in which he reaffirmed that the criteria were more important than the timetable.
Mr Lind said: "A growing body of opinion in Germany is arguing for delay. But the debate is now being conducted in public and that is an extremely damaging thing to do, given the tetchiness of the markets."
In fact the economic news this week was mildly encouraging on the EMU front. A survey of German business confidence was gently optimistic, suggesting that growth will pick up later in the year.Reuse content