LEADING ARTICLE : Emu hopes sink with the peseta

What price a single European currency now? Down go the Spanish peseta and Portuguese escudo, devalued for the fourth and third times respectively since 1992. Down go the Italian lira and French franc, both of which touched all-time lows yesterday against the German mark. Down go the Swedish krona and our own pound, both testing record lows. And all the time, up and up goes the mark, like a rocket into the stratosphere. If this is exchange rate convergence, one can only wonder what divergence would look like.

The European Union can draw several lessons from the latest troubles on the currency markets. One is that there is no point in continuing to pretend that a single currency could come into effect by January 1997, the first target date set in the Maastricht treaty. Quite clearly, too few countries will meet the necessary criteria on public debts, government budget deficits and exchange rate stability. To suggest otherwise, as the European Commission president, Jacques Santer, and others have done, is to obfuscate the real issue - which is whether monetary union will prove possible by January 1999, the second target date.

Maastricht stipulates that those countries that fulfil the treaty's conditions by 1999 can launch a single currency. In theory, as few as two countries - say, Luxembourg and the Netherlands - could go ahead on their own. But in reality it is virtually unthinkable that the project could take off unless France and Germany were involved from the start. And here lies the crux of the problem. Is France economically strong enough, and is Germany politically determined enough, for monetary union to begin less than four years from now?

The French economy is fundamentally healthy, but the franc is historically a weaker currency than the mark. The French authorities need to keep interest rates at a higher level than in Germany in order to maintain the franc's value. If France is to meet the Maastricht criteria by 1999, its leaders will have to pursue rigorous financial policies for the next four years to control public spending and prevent the franc from falling against the mark. Such policies will risk locking a permanently high unemployment rate into the French economy. Already about one in eight French workers is out of a job, and the need to reduce unemployment is a dominant theme of the current presidential election campaign. This does not square easily with the goal of joining a single currency.

For their part, German politicians and bankers insist that they will not give up the mark unless the Maastricht criteria are rigidly observed and exchange rate stability is firmly established in the run-up to 1999. German public opinion is solidly against sacrificing the mark for a weaker all-European currency. Recent events on the foreign exchange markets can only reinforce German doubts about monetary union.

The final lesson is that, if a single currency does emerge, no southern European country will be able to join it in 1999. Greece, Italy, Portugal and Spain will be consigned to the lower of two European tiers and could stay there indefinitely. That would create deep wells of resentment against the richer northern countries. As it proceeds to ever closer union, the EU must be careful that it does not simultaneously create ever deeper disunity.