German doubts provoke row over single currency

European disunity: On eve of a summit, Bonn slights partners' economic performance as Britain calls for closer ties with US

The European Union was embroiled yesterday in an embarrassing public row over its plans for monetary union, after Germany clashed with the EU Commission, and with Italy and Belgium. Germany's Finance Minister, Theo Waigel, angered officials in Rome and Brussels by saying on Wednesday that Italy would not meet the Maastricht Treaty's conditions for joining a single currency in 1999 and that other countries, including Belgium, would find it difficult to do so.

Mr Waigel's remarks caused the lira and Italian government bonds to slump. Ministers in Rome and Brussels protested, but in a sign that Germany is not about to back down, a member of the Bundesbank council, Reimut Jochimsen, said France, too, needed to improve its public finances.

The row touched off a storm on the eve of the EU summit in Majorca that will discuss the prospects for a single currency. EU governments have set themselves the target of next December for giving the currency a name and outlining a scenario for introducing it.

Officials in Bonn defended Mr Waigel, saying that anyone familiar with Italy's economy, especially its public debt, which runs at 124 per cent of gross domestic product, would agree the lira would not be able to join a single currency quickly.

However, his remarks destroyed weeks of confidence-building by Italy's Prime Minister, Lamberto Dini, who is due to present a deficit-cutting budget to parliament next week. Mr Dini had hoped to return the lira to the exchange rate mechanism. As founder members of the European Community in 1957, both Italy and Belgium would regard it as a humiliation if they were barred from being among the first entrants into a single currency.

Mr Waigel upset the Commission earlier this month by warning that the Maastricht criteria for creating a single currency should be tightened. He said governments participating in monetary union must keep their budget deficits and public debts below the respective Maastricht targets of 3 per cent and 60 per cent of gross domestic product.

In a rebuke to Mr Waigel, the Commission's president, Jacques Santer, said yesterday: "We must not add supplementary conditions for those entering economic and monetary union. The criteria to be respected have been fixed."

Although Germany is publicly committed to achieving monetary union by 1999, it fears Maastricht contains loopholes that could wreck the project. The main one is that countries with big deficits and public debts, including Italy and Belgium, can enter monetary union if they are deemed to be approaching, rather than having met, the targets. Germany fears this could turn into a back way into a single currency for countries that have not kept their finances in order.