Outlook: Brussels surveys hazy EMU future

The European Commission's report yesterday urging EMU aspirants to get a move on with the practical preparations for the single currency carried echoes of Nero fiddling while Rome burned. For over in Rome Romano Prodi's 17-month old government was staring crisis in the face. Its 1998 budget faces defeat over planned welfare spending cuts that are essential if Italy is to more or less meet the Maastricht criteria; and the government, long-lived by Italian standards, might have to call an election.

True, this is a bit unfair to the Commission. For there can be almost no doubt now that the single currency will start on time for a number of countries. Even for those not joining in the first wave - which almost certainly includes Britain despite the Government's efforts to pose as cuddly Europeans without actually changing the policy yet - a lot of practicalities still have to be addressed. British businesses, especially in financial services, will have to adjust to trading in euros anyway, and will have to update their accounting and computer systems at the same time as reprogramming them to cope with the year 2000 problem.

However, the future outline of the single currency is still hazy. Just over a year from the start date it is not at all clear when or whether two of the four biggest economies in the EU will join. Although many in the City now assume Labour will find it hard to stay out after 2002 there must be, as a big new study by ABN Amro points out, a political debat ahead. Even Euro-enthusiasts can be forgiven for thinking it is a reckless approach to such an important project to leave the debate until the last minute.

The implication of the uncertainties is more sharp moves in the financial markets. During the past week gilt yields have closed on bund yields as the markets responded to hints and whispers that the Labour Government was minded to join the single currency soon after the first wave. And Italian bonds and the lira have fallen in reaction to the fiscal and political turmoil. Both moves were predictable - and some analysts have indeed been predicting them for a few weeks. Gilts were undervalued, Italian bonds overvalued.

However, these moves could be reversed as long as the political decisions are put off. If Labour senses a swing in the public mood against EMU and drops a few uncuddly hints, it could lose the bonus it gained in the financial markets this past week.