Paris and Bonn put brave face on EMU crisis

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Despite British predictions to the contrary, senior government ministers in France and Germany insisted yesterday that the European Union would proceed on schedule with its plan to launch a single currency in 1999.

Prime Minister Alain Juppe of France, his Foreign Minister, Herve de Charette, and Germany's Foreign Minister, Klaus Kinkel, reaffirmed that monetary union would not be postponed and there would be no watering down of Maastricht's strict criteria for countries wishing to join the single currency.

Behind the unflinching exterior, however, it has become clear this week that EU governments have begun to contemplate the possibility that it may not be a good idea to go ahead with monetary union as planned in 1999. The doubts coincide with a conviction among European politicians and bankers that the Maastricht timetable is too rigid and takes no account of the slowdown in the European economy.

Only yesterday, France's Industry Minister, Franck Borotra, said that if he had to choose between Maastricht and jobs, he would choose jobs. Moreover, even Mr de Charette, before issuing his statement of unconditional support for the Maastricht treaty, had told a French radio station that it might be useful to interpret the treaty's rigid conditions on low budget deficits more flexibly, as proposed on Wednesday by a former president, Valery Giscard d'Estaing.

Italy's Prime Minister, Lamberto Dini, made much the same point about the cost in European jobs a few weeks ago when he said it would be foolish to proceed with the Euro, the recently christened single currency, as long as EU-wide unemployment averaged nearly 11 per cent. Mr Dini seemed to underline Italian doubts about the wisdom of sticking to the 1999 deadline when he said that, as the country holding the EU's rotating presidency, Italy would henceforth concentrate its efforts on job creation.

Meanwhile, Sweden's Finance Minister, Goran Persson, announced that he intended to relax the austerity programme he introduced last year, raise social security benefits and take measures to halve unemployment by 2000. This was tantamount to saying that Sweden had no interest in joining a single currency in 1999.

However, the real bombshell came from Spain on Tuesday, when the Foreign Minister, Carlos Westendorp, in remarks not intended for publication, revealed that the EU would delay the 1999 launch unless a "critical mass" of countries met the Maastricht targets in time. These included Germany, France, the Deutschmark-zone states (the Benelux countries and Austria), and at least one from Britain, Italy and Spain.

France was convulsed before Christmas by its worst social unrest since 1968, and its economic growth this year is likely to be well below government predictions. The Maastricht deficit target of only 3 per cent of gross domestic product in 1997 is looking increasingly difficult for the French government to meet.

Still, if there were enough political will, it is possible to imagine circumstances in which France - and other countries with deficit and public debt problems, such as Austria and Belgium - would be deemed suitable candidates for monetary union even if they did not quite meet the Maastricht targets. After all, Maastricht permits countries to join the single currency if they are making sufficient progress towards, rather than actually meeting, the deficit and debt targets.

With Britain, Italy and Spain it is another matter. Few EU governments or independent economists think these countries will join up in 1999, either for political or economic reasons. The European Commission decided this week not to promote the Euro in Britain, a sure sign it does not expect Britain to be in the project from the start.

As for Italy, its formidably high public debt - 124 per cent of GDP, when Maastricht requires an upper limit of 60 per cent - makes it an unlikely participant. Spain not only has a budget deficit of 6 per cent of GDP but shockingly high unemployment of almost 23 per cent, causing one former finance minister, Miguel Boyer, to comment this week that for Spain the Maastricht timetable was "a political trap with a high economic price".

The European Commission complains that to associate Maastricht with unemployment and recession is unfair. Officials correctly point out that EU governments would need to cut their deficits whether or not there was a single currency project. However, if Mr Westendorp's leaked remarks are accurate, it seems likely that either the Euro will not be launched on time, or the Maastricht criteria will have to be reinterpreted.

The problem is that to dilute or delay Maastricht would almost certainly cause enormous turbulence on the foreign exchange markets, possibly dooming the single currency for ever.