Kohl admits the bad news is not just from Italy

Germany and Italy yesterday brushed aside differences over European Monetary Union, but conceded that the project might yet be sunk by the growing burden of mass unemployment.

Italy is furious with German efforts to thwart its entry into EMU, but yesterday the row took on a new dimension as Chancellor Helmut Kohl admitted for the first time that Bonn was on course for busting the Maastricht criteria. "It could lead to that," Mr Kohl said, "if we did nothing."

Mr Kohl's meeting with Romano Prodi, the Italian Prime Minister, sought to patch up their disagreements, and rejoiced in finding much common ground. "Unemployment in both countries is above 12 per cent," Mr Prodi boasted.

Germany was admitted to the 12-per cent club earlier this week, thanks to the disappearance of half a million jobs last month. Though the government had anticipated some increase, the scale took it completely by surprise, and now threatens its efforts to qualify for monetary union.

In its annual report issued only a few weeks ago, Bonn reckoned with a 2.9 per cent budget deficit, a whisker within the Maastricht confines. The real figure "will not be so optimal", declared Mr Kohl yesterday.

The Chancellor is pinning his hopes on an economic recovery forecast for the middle of the year, and stressed again yesterday that the government remains committed to monetary union, and will be taking further measures to encourage competitiveness and growth. "Everybody must do their homework," he said.

But Italy has been doing its homework, to the extent that it stands no worse chance of meeting the Maastricht rules than Germany, yet Bonn remains mistrustful. Though Mr Kohl denied reports that Germany wanted to delay Italy's entry to EMU, Italians continue to suspect a plot.

"Nobody has the right to make judgements on others a year before the deadline," said Mr Prodi, in a pointed reference to the latest German manoeuvres. According to a report in the Financial Times, Eurocrats with German backing were planning to postpone Italy's entry until at least 2000, irrespective of its economic performance in the current, qualifying, year.

Bundesbank officials and members of the German governing parties often accuse Italy of cooking the books. But Mr Prodi, who has vowed to exercise "iron discipline", counters that the profligate days are over, and his country will never again stray from the fiscal straight and narrow.

"Italy in the past did not fulfil any of the Maastricht criteria," Mr Prodi said in a German newspaper interview. "In contrast to that, we are now fulfilling several of them. For example our inflation rate is 2.5 per cent to 2.6 per cent. I do not see any difference between Italy and Germany in the fight against inflation."

The Germans are not convinced. Their assessment that the lira remains unstable, and therefore a threat to the euro if ever absorbed, was confirmed by the Italian currency's crash after the first rumours this week. But the Deutschmark is not doing well these days, either.

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