Outbreak of peace boosts EMU

This week's outbreak of peace and love between Chancellor Helmut Kohl and the new French prime minister, Lionel Jospin, has only marginally increased the likelihood of monetary union proceeding on time, according to our panel.

Eric Fishwick of Nikko Europe said Thursday's first meeting between the two political leaders, which led to new commitments to push the project forward, produced only platitudes. He still expected the Bundesbank to tighten monetary policy over the next month or two, given its concerns over inflation, but not enough to knock EMU off course.

That would require a 1 to 1.5 percentage point jump in rates, whereas he reckoned that the repo rate at which the central bank lends to other banks, currently 3 per cent, would rise by anywhere between 0.25 and 0.4 per cent by the year-end.

In fact, not much seems to have happened in the past week to separate the bulls from the more sceptical in our team. Bruce Kasman of JP Morgan continues to be one of the most optimistic members of the panel, suggesting not much is likely to knock EMU off course until the Italian budget due at the end of next month.

Negotiations between the government and trade unions over pension reform will be important in deciding the outcome there.

In fact, both Mr Kasman and Martin Brookes of Goldman Sachs suggested that things looked to be going pretty smoothly for EMU ahead of next month's meeting of European finance ministers.

One of the few who has upped his probability for EMU keeping to its 1999 timetable was Robert Lind of ABN Amro. He pointed to the comments by Hans Tietmeyer, the Bundesbank president, that the central bank would have to take account of European considerations in setting monetary policy. Given his relative closeness to Chancellor Kohl and the French, Mr Lind said: "This tells me clearly that Bundesbank policy is not being driven by the German economy but by the political dynamic of what would be more acceptable to the French."