But if the French vote 'yes', there will be a good chance that the European Monetary System (EMS) and its economies can begin to pull out of the woods.
The devaluation is a signal that ultimately Europe's finance ministers will give ground if the foreign exchanges press them hard enough: billions of dollars have been spent by both the Germans and the Italians to hold the lira's target parity against other European currencies. They have failed to do so. Moreover, they have been forced into a reduction of the target floor of an EMS currency for the first time since February 1987. Inevitably, the credibility of the system is weaker today than it was on Friday.
But there is another way of looking at what has happened. Italy is not in the same position as other members of the EMS. Its political system is in crisis. The rule of law is flouted by organised crime to the extent that the state is unable even to protect leading criminal judges.
The budget deficit - the excess of public spending over tax revenue in each year - is running at more than one-tenth of national income. The public debt is more than twice as much, in proportion to national income, as Britain's, France's or Germany's.
Moreover, the devaluation is arguably the less significant part of yesterday's package. The real meat lies in the commitment of the independent Bundesbank to reduce its interest rates, a move which will be ratified by an early meeting of the policy-making council today. We do not how much the cut will be, but it is inconceivable that the secretariat should have made such a commitment without being certain that it could deliver. As such, it has performed a notable U-turn. Even the Bundesbank has been forced to co-operate, albeit largely by the mass of marks being sold by other European governments and inconveniently boosting the German money supply.
If the French vote 'yes', the rest of Europe's interest rates may be able to fall. Because the Germans have never devalued their currency in the post-war period, investors usually seek a higher interest rate on other currencies as a premium against the risk of capital loss. As a result, German interest rates in effect form the floor for interest rates across the Continent. With the gap of nearly 7 percentage points between German and American interest rates also beginning to narrow at last, money may begin to flow out of Frankfurt to New York. A stronger dollar - and a weaker mark - will make it easier for other European currencies to keep their link with the mark.
But there is more to this agreement than economics. It is also high politics, as the French government showed when it said that the deal would mean lower interest rates in France. President Francois Mitterrand needs all the help he can get if he is to win his gamble on Sunday.
The Bundesbank has ultimately bowed to the pressures from the Bonn government - and every other government in the European exchange rate mechanism (ERM) - to take into account not only the unification-led inflation within Germany, but also the recessions in the rest of Europe. There is an irony. In helping to save Maastricht and a European currency, the Bundesbank may be writing its own death warrant.Reuse content