French Referendum: Italy to await lower German rates: Nation most affected

ROME - Italy's Treasury Minister, Piero Barucci, indicated last night that Italy would not rejoin the exchange rate mechanism until Germany had lowered its interest rates. He also called for greater co-ordination of EC members' monetary policies.

Mr Barucci, who was attending an International Monetary Fund meeting in Washington, said: 'In order to return to a convergent agreement within the European Monetary System we must restore stability on the money markets.'

After the G7 Summit in Washington, the problem still to be solved was the high German interest rates, he said.

Earlier he had said it was far from certain that the lira would return to the ERM on Tuesday. His attitude appeared to have hardened in the hours since the end of the G7 meeting.

Emilio Colombo, the Foreign Minister, said last week that it would 'certainly' re-enter the ERM tomorrow, but it remained to be decided at what level compared with the other currencies.

Italians, still numbed by the Draconian measures announced by the government last week to cut the country's colossal deficit and begin to bring its finances into line with the discipline required by the Maastricht treaty, waited anxiously for the outcome of the French referendum, which was likely to affect them more than any other EC country.

For 'Maastricht' represented a straitjacket which would oblige the politicians to push through extremely unpalatable reforms.

'We really have to hope that the 'yes' vote emerges victorious from the French ballot boxes - for selfish reasons,' wrote Paolo Mieli, the new editor of the Corriere della Sera, yesterday.

The French voters would be deciding 'whether our immediate future will be within a negotiated system of rules which keep us tied, as far as possible, to the more modern and advanced part of the continent or whether we will take a terrible leap backwards into that land of self-indulgence, of consumption paid for by inflation . . . of wasteful social services.'

The run-up to the referendum had laid bare the inadequacies of some countries - 'Italy first among them' - in keeping to the timetable for economic fusion laid down in the Maastricht treaty and, secondly, 'the scandalous lack of values, conviction and strong sentiment which would have compelled the European masses to participate in the construction of this new organism'.

A comment in La Repubblica said a 'no' vote would 'be equivalent to a refusal to pursue European integration alongside a reunited Germany, too big, too strong, too rich. It would be a 'no' to the federal republic - democratic, but inhabited by the ghosts of history, friendly but with a mark wielding a power out of all proportion to that of the other currencies.'

Economists in the City of London fear that a 'two-speed' Europe is likely to develop from yesterday's vote, in which Italy - with Britain, Spain and Portugal - is expected to be relegated to the second division. 'Germany, France, Belgium, the Netherlands and Luxembourg look solid. Others will move to monetary union at a slower pace,' said Nigel Richardson, of Warburg Securities.

The currencies closely linked to the German mark are expected to move to permanently fixed exchange rates - and then a single currency - more quickly than countries which remain on the periphery.

The French franc is the currency whose position is most in doubt in a two-speed Europe. France is not a member of the German block, but has earned credibility in the ERM over recent years through tight interest rate-policies. Alison Cottrell, of Midland Montagu, said she expected the franc to come under considerable selling pressure in the next few days as the markets test 'the willingness of the Bundesbank to support the franc as a 'core' ERM currency'.

(Photograph omitted)