Monetary time-bomb ticks again for Europe

Tony Barber, in the first of two articles, examines the resurrection of plans to merge EU currencies

Less than 18 months after European monetary union was being written off as an impossible dream, it seems all but certain that the European Union will have a single currency, albeit limited in scope, by the end of the century. Despite formidable ec onomicobstacles, the project is moving inexorably forwards as a result of the determination of leading European politicians, above all in France and Germany.

"France has the economic capacity and the political will to change to a single currency," the French Prime Minister, Edouard Balladur, said this week. His remark was significant because he is the favourite to succeed Francois Mitterrand as president in elections next April and May and had previously appeared less enthusiastic than other French leaders about full European integration.

The movement to a single currency seems certain to detonate a political explosion not only in Britain, where the Conservatives are divided over Europe's future, but in states such as Italy and Spain. These countries fear exclusion from a Franco-German initiative to establish a single currency, but are unlikely to be part of the project from the start because their economies are not strong enough.

Monetary union seemed a distant goal in 1992 and 1993, when turbulence on European markets forced the virtual collapse of the Exchange Rate Mechanism, the structure used to keep currencies from fluctuating too much against each other. But with economic growth replacing recession the European Commission believes a currency union is once more feasible.

The Maastricht treaty set a first target date of January 1997 for the final stage of monetary union, which involves the irrevocable fixing of exchange rates. However, since a majority of EU members will not meet the strict criteria for monetary union by then, the project is more likely to begin after the second target date of January 1999, with participation limited to Belgium, France, Germany, Luxembourg and the Netherlands, possibly joined by Austria and Ireland.

Closer integration among all EU members will prove impossible now there are 15 members. Economic performance levels are too far apart between countries such as the Netherlands and Greece, and the political will for closer union is assumed to be lacking in Britain and Denmark, which have reserved the right not to join a single currency.

With the EU expected eventually to include former Communist countries such as the Czech Republic, Hungary, Poland and Slovakia, French and German leaders say the whole project of political and economic union risks being blown apart unless a handful of properly prepared countries go ahead on their own. France's Minister for European Affairs, Alain Lamassoure, has suggested an inner group - presumably including France, Germany and the Benelux countries - should sign a "new founding contract" for federal union.

Many French politicians believe this scheme is essential to lock Germany into a political and economic union as soon as possible. They argue that the alternative prospect of a loosely structured EU will serve only to enhance German domination of Europe, especially after the EU expands to incorporate Germany's eastern neighbours.

For leaders in France, Germany and the Benelux countries, monetary union is meaningless unless it is accompanied by a political union that involves a reduction of national governments' powers in favour of federal European institutions yet to be defined.

There is little doubt the new institutions will have powers far beyond present EU arrangements. That is Germany's price for giving up the mark in favour of a single currency.

Five years from now, if a single currency is created, the EU may be transformed into three groups. Germany and France would lead the first group, which would include all countries with the political desire and economic strength to enter a currency union.Italy and Spain would lead the second group, composed of countries willing but not yet economically capable of joining a single currency.

The third, outer group will comprise those countries unwilling to enter a currency union and the political union that must come with it. Senior French and German politicians have few doubts Britain will lead this group, which may in fact be a club with amembership of one.

Tomorrow: the economic issues