A MAJOR disagreement between the German government and the Bundesbank has led to doubts about the timetable for European monetary union and about whether the single currency will lead to lower interest rates.
As the divisions in Germany deepened, the governor of the Irish Central Bank, Mr Maurice O'Connell, warned that there was no guarantee that monetary tin ion would bring lower borrowing costs. It was too early to assume that economic or political problems would not derail the project, he said, although it remained very likely that it would proceed on schedule.
While the Government has said that monetary union would lead to a future of low interest rates, Mr O'Connell warned that it would be a mistake to conclude that Irish rates would automatically come down substantially in the move to the single currency.
Mr O'Connell's comments came as a major row developed in Germany between the governments and the Bundesbank over the plan to revalue the bank's gold reserves to help Germany to qualify for monetary union.
Bonn insisted that it would override Bundesbank objections to its plan. The Finance Minister, Mr Theo Waigel, said yesterday that the revaluation of Germany's gold was not an attack on the central bank's independence and would not affect the stability of the new currency.
German opposition leaders condemned what they called a "hold up" of the gold reserves. And the Bundesbank's attack on the government plan looks set to deal a fatal blow to Germany's authority in determining the strength of the new euro currency and negotiating on the new European Central Bank, which will manage the euro.
The clash has led to fears that Germany will be in no position to argue that other states not fulfilling the rules should not be able to join the single currency. This would weaken the currency and threaten the promise of low interest rates.
In his speech yesterday, Mr O'Connell warned that European interest rates were already at "unusually low levels" and might well move upwards before monetary union comes into effect. The new European Central Bank might also raise rates immediately to gain credibility. "The early days may be rather uneasy," he warned.
The European Central Bank will be more likely to pursue higher interest rates if it fears that political factors are threatening confidence in the single currency. French officials were privately hoping that the conflict between the Bundesbank and the Bonn government would prove that a strict interpretation of the Maastricht criteria was not possible.
The adherence of the French, Prime Minister, Mr Alain Juppe, to German style economic orthodoxy contributed to his downfall and few French politicians now advocate further austerity measures.
The German dispute strengthens Mr Lionel Jospin and Mr Philippe Seguin, who are competing for the prime minister's job in Sunday's French election. Both advocate a lenient interpretation of the criteria, based on trends in economic performance.
Commenting on the revaluation of German gold reserves, Mr Jospin told French radio: "Our German friends, who are so rigorous about the criteria, are looking to see if they can't fudge things."
Germany, will have to win the approval of Eurostat the European Commission's statistical service, to use the gold proceeds for Maastricht qualification. Yesterday, the Commission was playing its cards close to its chest on whether the profits arising from the gold revaluation would be allowed to count towards reducing the German deficit.
But the Commissioner for Economic Affairs, Mr Yves Thibault de Silguy, insisted that he believed Germany would meet the requirements of the Maastricht Treaty and said that the single currency would be introduced on time.
"For me, there is no risk concerning EMU. I'm confident the German government will be ready in due time," Mr de Silguy told reporters.