Bavarian premier breaks Kohl pact on timing of EMU

Bavarian Premier, Mr Edmund Stoiber, has stepped up his campaign to delay the launch of European monetary union

Bavarian Premier, Mr Edmund Stoiber, has stepped up his campaign to delay the launch of European monetary union. He ended a truce with German Chancellor, Dr Helmut Kohl, over the planned single currency, yesterday.

Dr Kohl, after days of scathing criticism of monetary union by Mr Stoiber, caved in last month and made clear that Germany would not accept a soft European currency.

But Mr Stoiber appears to have ended a six-week-old pact with Dr Kohl and has launched a new round of attacks in interviews with international newspapers, aimed at floating an alternative to launching EMU on time in 1999.

While not ruling out a punctual launch of the new euro currency, Mr Stoiber insisted that Germany and France, the twin engines of European integration, must strictly meet the fiscal targets this year to qualify for monetary union.

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"If France or Germany do not respect the criteria to the letter, we will find another alternative," Mr Stoiber said in an interview with French financial daily La Tribune. "I can easily imagine that the best solution is to give ourselves two extra years, until 1999, to meet the criteria and then reduce the intermediate phase," said Mr Stoiber, a member of Finance Minister Mr Theo Waigel's Christian Social Union party.

Mr Stoiber warned that the current weakness of the deutschmark, in part a reflection of market concerns about a soft euro, could spark a political backlash in Germany if people saw their hard-earned savings eroded by inflation and a weak euro.

Should the deutschmark continue to slide against the dollar and major European currencies, Mr Stoiber warned that the Bundesbank could raise interest rates.

"If the dollar was to climb over two marks, it is difficult to see how the Bundesbank could not react, with all the negative consequences for Europe," Mr Stoiber said.

Should the Bundesbank raise official interest rates, other European countries would be forced to follow suit.

Mr Stoiber's office in Munich said that he had worked out a proposal, which had been discussed with Mr Waigel, that would delay the planned fixing of European exchange rates but not the final phase of monetary union. Mr Waigel has repeatedly refused to consider delaying EMU.

Mr Stoiber suggested that European countries did not need three years to put the euro into operation and that by fixing exchange rates on January 1st, 2001, instead of in 1999, Europe could still introduce the new currency on time in 2002.

Independent economists have long considered this the most likely scenario should Germany and France overshoot the goal of limiting budget deficits to 3 per cent of GDP called for in the Maastricht Treaty.

Such a plan would give EU members more time to meet the Maastricht targets without delaying the final conversion to a single currency.

"This version bears the credibility of the entire project and would give candidates two extra years to qualify for monetary union honestly and with undeniable marks," said the Sueddeutsch Zeitung in and editorial backing Mr Stoiber.