Who'd put money on the Euro now?

A taboo has been broken. Across Europe, leaders are openly questioning the virtues of monetary union, reports Tony Barber

It is not everyone's idea of how to spend the August holidays. But as Europe's politicians, industrialists and bankers drifted back to work last week, it became clear that many had spent their summer break in profound reflection about the prospects for the Euro, the planned single European currency.

Those who advocate the launch of monetary union on schedule in January 1999 were not pleased to learn that the conclusion reached by some of Europe's most prominent public figures was quite different. Worse still, what started as a trickle of doubt in Italy at the start of the week had turned into a stream in Sweden by Wednesday and, later this autumn, could gather into a torrent across the whole of Europe.

Until last week, it was considered virtually taboo in most European Union countries for government ministers to question openly whether monetary union should start in accordance with the timetable and criteria set out in the 1991 Maastricht treaty. That taboo was broken last Sunday by Italy's Deputy Prime Minister, Walter Veltroni, who pointed out that economic growth was so sluggish in Europe that many countries (including his own) might not meet the Maastricht conditions on time.

"We must see if it might not be the right thing to sit around a table to rediscuss the criteria or their interpretation, or maybe even the timing of monetary union," he told the newspaper Corriere della Sera.

Just two days earlier, a similar view had been expressed by Cesare Romini, chairman of Fiat and one of Europe's most powerful businessmen. He said it would be worthwhile for Italy to delay joining the Euro if this meant unemployment could be reduced.

Doubts over monetary union in southern Europe were soon echoed in the north, when Sweden's Finance Minister, Erik Asbrink, virtually ruled out Swedish participation in the scheduled 1999 launch. Although Sweden stands a better chance than Italy of meeting the Maastricht terms, the government has retreated in the face of strong anti-Euro opposition in the ruling Social Democratic party and among the Swedish public.

By last Wednesday, European foreign exchange dealers were scenting trouble and selling the French franc - the one EU currency that must hold its own against the German mark up to 1999 if monetary union is to take off. The franc was under pressure because the markets suspect the French government's economic policies are running into trouble, but also because they have never been convinced of President Jacques Chirac's commitment to the Euro.

The Gaullist-led government wants to slash spending and cut the budget deficit to the Maastricht-stipulated level of 3 per cent of gross domestic product, but is also (rather unconvincingly) promising to reduce taxes and unemployment. With more than 3 million French jobless (12.5 per cent of the workforce), there is a risk of strikes and social unrest this autumn as the government imposes austerity measures on a discontented populace.

The question posed by opponents of the 1999 launch date is why governments everywhere are scrambling to cut state spending by billions of pounds when their economies badly need growth, and 18 million EU workers - more than one in 10 overall - are unemployed. The answer, supplied by supporters of the 1999 deadline such as Chancellor Helmut Kohl of Germany, is partly that deficit-cutting is inherently virtuous, but more importantly that the grand project of European integration may collapse if the Euro is not launched on time.

However, most EU governments, particularly centre-left ones such as those in Italy and Sweden, recognise that European integration will hold little appeal for the average citizen if it is identified with unemployment, job insecurity and belt-tightening. Yet the economic policies of all the candidates for monetary union increase the likelihood that people will draw exactly this connection.

Perhaps the biggest obstacle facing the Euro is the headlong rush to cut budget deficits across Europe. It virtually guarantees that there will be no substantial fall in unemployment before early 1998, when EU governments must decide which countries qualify for monetary union.

Pressures to delay the 1999 launch will grow as more and more public figures join eminent men such as Philippe Seguin, the speaker of France's National Assembly, and Oskar Lafontaine, Germany's Social Democratic leader, in questioning the wisdom of current policies. Mr Kohl and Mr Chirac, who meet in Bonn today, will no doubt try to brave it out, insisting publicly that there must be no relaxation of the two most important Maastricht criteria - low deficits and low public debts.

Yet flexibility will be essential if the Euro is to be launched in 1999. Few economists think France will cut its deficit to 3 per cent next year, yet monetary union is unthinkable without France. Likewise, Belgium has no chance of reducing its public debt to the required 60 per cent of GDP, yet monetary union is unthinkable without the country whose capital symbolises the EU to the world.

There are, in fact, some clever ways to slip past the formidable Maastricht conditions. One is to invoke treaty clauses which say, in essence, that a country can qualify for monetary union if its deficits and debts are heading in the right direction.

Another is to apply the 3 per cent deficit target only to "structural" budget deficits - that is, after allowing for the economic cycle. The deficits of most EU states have been swollen in recent years by reduced tax revenues and higher spending on unemployment benefits, but remove these factors and most EU countries would meet the Maastricht target.

Such manoeuvres are likely to hold the key to whether the Euro is launched on schedule. Those who oppose a 1999 launch may be forgetting that monetary union is fundamentally a political project, and the politicians who conceived it are capable of many a sleight of hand to ensure it starts on time.