Bonn conjures with nightmare Emu scenario

The German government never tires of assuring the public that European monetary union will go ahead as scheduled in January 1999. Calling for a delay, it keeps warning its own friends, might become a self-fulfilling prophecy.

"A debate about postponement leads nowhere," Theo Waigel, the Finance Minister, reiterated yesterday. Nevertheless, that is the debate that Germany has got, fuelled by various scenarios emerging from leaky government departments.

For, while they have been assuring Germans that postponement is not an option, Chancellor Helmut Kohl's aides have been busily planning escape routes. Version one, the meltdown scenario, foresees a day in the not- too-distant future when Bonn might have to cancel the project.

The result would be a leap in the value of the German mark, currently kept low by expectations that it will give way to somewhat softer money. Other currencies, notably the lira, would no longer be held afloat by the mark, and would collapse.

While speculators would double their fortunes overnight, there would be a political fallout. Several European countries that have worked hard for years to come up to German standards, would rightly blame Germany for ruining their economies.

To avert this catastrophe, German officials have devised what they think is a wonderful compromise; monetary union would start on 1 January 1999 as scheduled, but "only on paper". Exchange rates of participating currencies would be locked together gradually, starting with the most stable - the mark, French franc, Austrian schilling and Dutch guilder - and bringing in the other countries as they made the grade.

For the first year, therefore, the European Central Bank would only pretend to set interest rates and monetary targets across the core group. Its real work would begin a year later than planned, in 2000. The beauty of this arrangement is that it would give the likes of Italy and Spain an extra 12 months to put their houses in order. The delay would be justified by commercial interests: Shops have long been complaining that the current transitional period, during which they will have to juggle two currencies, is too long.

The final deadline of January 2002, when the euro is set to replace national currencies, would still be kept. There would, therefore, be no postponement, as Mr Kohl might well be arguing this time next year. Emu institutions could begin operating on schedule but the decision about which countries are members would be delayed.

Eric Fishwick, of Nikko Europe, said: "It is even possible that other countries could go ahead without Germany, so long as Germany is committed to joining pretty quickly. The Germans might see that as a better alternative to fudging the Maastricht criteria, given the symbolic significance attached to the criteria in Germany now."

But James Mitchell of Deutsche Morgan Grenfell said: "Germany is seen as the anchor of Europe. Emu can't go ahead without Germany."

However, public debate in Germany has taken "a pronounced anti-Emu turn," according to the director of the Bonn based Centre for European Integration Research. Speaking in London yesterday to a meeting organised by the Centre for European Policy Research, Jurgen von Hagen said: "EMU has never been popular in Germany. The move towards a single currency relied on two assumptions: that Germany would make the Maastricht criteria and that the German government could persuade the public to give up the Deutschmark. Both assumptions are now in doubt."

Mr von Hagen said that only 8 per cent of the German population believed there would be economic benefits from joining a single currency. However, the Kohl government had, he said, been extremely successful in equating monetary union and European integration. He said: "There is a long tradition in Germany: you can be anything, but you can't be against European integration. That is sacrosanct."