Storms ahead for monetary union

It has been a rather quieter week for monetary union watchers after the recent shocks involving Bank of England independence and German gold stocks, but it is likely to be the calm before the storm.

Next week sees Italy launch its next three-year economic plan, which will test its ability to adhere to EMU targets, but more important still will be tomorrow's first round of voting in the French elections, whose outcome could set the seal on whether the whole project goes ahead on time.

Opinion polls, now banned until the final results are known, show the centre-right government with a fairly comfortable lead, albeit drastically reduced from its current 367 seat majority.

The expectation in the markets is that Alain Juppe and his Gaullist-led coalition will show a stiffer resolve in holding to the strict criteria for monetary union that the Germans want than their socialist opponents. Unanimity between France and Germany would vastly increase the chances for the project kicking off in 1999 as planned.

But the waves from last week's decision by Germany to revalue its gold stocks continue to lap around EMU. The move has been widely condemned, not least from within the country itself, as a piece of creative accounting to let Germany off the hook when it became clear that its public deficit this year will comprehensively bust the 3 per cent of gross domestic product laid down by the Maastricht Treaty.

With Chancellor Helmut Kohl now apparently backing down from using revaluation as a deficit reduction device, at least this year, the implications for EMU remain opaque.

In the midst of this uncertainty, the broad consensus among our panel appears to be edging further towards EMU arriving on time, but in what form still remains unclear. Robert Lind of ABN Amro says the revaluation "sent a clear message that the German government will do whatever it can to meet the Maastricht convergence criteria."

Like Darren Williams of UBS and Julian Jessop of Nikko Europe, he believes the move makes it difficult for Germany to argue that apparently less economically rigorous countries like Italy should be excluded. At the same time, many of our panel point out that it is becoming increasingly likely that "peripheral" countries like Spain and Portugal will have to be included.