The European Crisis: Bonn counts cost of alliance with Paris: Strain on financial pact

THE CURRENCY-LED onslaught on the European institutions yesterday fought its way to the final rampart - the Franco- German alliance. In an unprecedented joint statement with the Banque de France, the Bundesbank said yesterday morning that 'the exchange rate between the franc and the German mark correctly reflects the state of their respective economies, so that there is no justification for a realignment'.

The news blackout imposed within the German Chancellery on the European crisis yesterday betrayed the palpable sense of panic in Bonn. With the franc under speculative pressure, and effectively dependent on the good will of the Bundesbank, the endurance and depth of the Paris- Bonn axis was being tested as it has rarely been before.

From both sides, the relationship is viewed as the motor of European integration. Without French and Germans working together, Chancellor Helmut Kohl likes to say, there can be no progress towards European union. It is no coincidence that, immediately after the French referendum on Maastricht, Mr Kohl went to Paris to discuss with Francois Mitterrand a strategy for holding course on the plans for European union. Maastricht was, after all, largely the brainchild of the French and the Germans. From Paris came the push towards economic union, while Bonn responded by campaigning vigorously for political union. Both sides see themselves as fighting to save an edifice which was conceived, in part, as an indestructible monument to the historic reconciliation between the two core nations of Europe.

It is a friendship which has shown signs of cracking in recent weeks, alarming the Chancellor. The anti-German statements, numerous on both the pro- and anti- Maastricht sides during the French referendum campaign, are taken seriously in Bonn. The government and the Bundesbank know French humiliation in the monetary battle would amount to a setback from which the European cause would have grave difficulty in recovering. This alone defines the qualitatively different way in which this crisis is viewed in Bonn from last week's currency assaults on Britain and Italy.

Such unusual efforts to help the French as yesterday's statement go beyond the economic assessment that the franc, in contrast to the lira and sterling, does not deserve to suffer devaluation. The assistance is, in the last resort, political. Chancellor Kohl has no doubt that for the sake of Western Europe, the Franco-German relationship must be defended at all cost. Should the franc continue to come under pressure, then that cost might have to include a notable reduction in German interest rates, which the Bundesbank would prefer to avoid. The temptation to launch a counter-offensive against the speculators and Euro-sceptics with some grand Franco-German initiative is being tempered, however, by concern that it could do as much harm as good. Bonn is aware of the sensitivity in London and Rome towards Germany's role in the crisis. Mr Kohl fully understands the difficult position of John Major, within the Conservative party, on Europe. A Franco- German initiative could give the British and Italians the impression they were being left outside, which would ruin any hopes of Mr Major holding the line on Europe.

Chancellor Kohl is trying to weigh up whether everything may be at risk, so that drastic action is needed just to rescue a part. The core of that part is the Franco- German alliance. The former head of the Bundesbank, Karl Otto Pohl said yesterday that the European exchange rate mechanism, centered on the mark, should be ended. Instead, a currency union should be established 'in the near future'.

Leading article, page 28