The Europe Debate: Italy on way back to ERM, with one eye on the single currency

MONEY

The Italian government is considering returning the lira to the European exchange rate mechanism on 22 June, just before the end of the country's EU presidency.

But Britain, which fell out of the ERM in 1992 after the pound came under pressure on international markets, continues to resist re-entry.

The Italian cabinet is committed to returning to the ERM and eventually joining the single currency. It is debating the merits of re-entry later this month rather than in the autumn, and is due to decide within a week.

Moving swiftly would have the advantage of improving the country's chances of joining the single currency right from its start. On the other hand, delaying for several months would give the new government more time to draw up a Budget that would be credible with the financial markets.

The new government is enjoying a honeymoon with the markets, but financiers want to see it administer a strong dose of budgetary medicine to bring the huge national debt under control.

Andrea Delitala, Italian economist at investment bank Deutsche Morgan Grenfell, said: ''There is no room to save money from the government deficit in a non-painful way. They must define a credible fiscal policy with budget measures that will save at least 15 trillion lire (pounds 6.25bn).''

The new Prime Minister, Romano Prodi, has said he plans a supplementary budget in mid-June.

The government deficit increased sharply betweem April l995 and last April. Cuts of 10 trillion lire (pounds 4.56bn) have been drawn up to help bring the shortfall back towards the 109.4 trillion lire (pounds 50bn) target for 1996.

The Italian currency has already recovered nearly 25 per cent of its value against the German mark during the past 12 months, while the pound has climbed less than 7 per cent. The pound and lira were ejected from the exchange rate mechanism together in September 1992.

Britain continues to resist pressure to rejoin the ERM. Kenneth Clarke, the Chancellor, yesterday claimed "game, set and match" for Britain after saying he had successfully deferred a decision on whether Britain must join another exchange rate mechanism. Mr Clarke was attending a meeting of finance ministers in Luxembourg.

Several member states argue that Britain must join the ERM under the Maastricht treaty if it wants to keep open the optionof taking part in the single currency; Mr Clark has always insisted no such obligation exists. After the Luxembourg meeting, dominated by the beef controversy, Mr Clarke said his partners had agreed to defer the entire issue until the Dublin summit in December.

Mr Clarke was yesterday openly relishing German discomfort over the European Commission's finding that it exceeded the Maastricht budget deficit requirement for 1995, when its deficit reached 3.5 per cent of gross domestic product. Germany now faces Commission penalties, it was confirmed. Mr Clarke said ebulliently: "We dealt with the excessive deficit procedure by confirming that Germany has an excessive deficit."

All but the three smallest of the 15 EU economies are on the so-called excessive-deficit list. Denmark was taken off the list yesterday, joining Ireland and Luxembourg.

EU forecasts show the budget gap widening still further this year to 3.9 per cent as Germany's record unemployment cuts tax revenue and pushes up welfare spending. The same forecasts, released last month by the EU's executive agency, show Germany sneaking in below the 3-per-cent deficit barrier in 1997 - when the decision on who adopts the euro will be taken. The finance ministers yesterday tried to progress plans for a so-called stability pact, a German idea whereby countries in monetary union pledge to meet economic convergence criteria after 1999. Some states oppose German support for fining states that do not meet the criteria.