Germany unwilling to invite "rowdy" guest to euro party

GERMANY'S determination to exclude Italy from the first group of European Union member states to join European Monetary Union (EMU) owes as much to domestic politics as to economics.

For most Germans, the Italian economy represents a rowdy and unpredictable guest who could upset the smooth celebration of the birth of the euro. The lira is widely seen in Germany as the ultimate in weak and unstable currencies, quite the opposite of the sturdy, reliable deutschmark.

The Chancellor, Dr Helmut Kohl, and his Finance Minister, Mr Theo Waigel, fear that the German public, which already opposes abandoning the deutschmark by a margin of two to one, would simply refuse to accept a new currency immediately "contaminated" by association with the lira. Their difficulty has been to devise a stratagem for excluding Italy that causes minimum offence to an important EU partner but reassures voters at home that the currency will remain strong.

German popular prejudice about the Italian economy sits uneasily with widespread affection for a country celebrated by Goethe as "the land where the lemons blossom".

"Germans admire Italy in all sorts of ways, not only in a sentimental way but for industrial achievements too and for their flair and their gift for innovation. But where the currency is concerned, a kind of superstition persists and remains extremely strong," according to Mr Klaus Dieter Fankenberger, a political analyst with the daily Frankfurter Allgemeine newspaper. What makes this superstition more potent is the quasi religious attitude many Germans take towards currency stability.

After the destruction and shame of the second World War, the deutschmark became a symbol of Germany's postwar economic success, achieving an almost totemic national significance. The political debate about EMU has been muted in Germany, partly because all the main parties have tacitly agreed to avoid making it an election issue.

Yet both Dr Kohl and Mr Waigel know that they must reassure voters that their cherished currency will remain secure and stable after EMU.

This is the background to their tough stance on a stability pact binding EMU members to the strict economic entry criteria agreed at Maastricht even after the new currency has been established.

It also explains Bonn's insistence that the new European Central Bank (ECB) should remain free from political interference, just as the Bundesbank is in Germany today.

Until recently, Germany has attempted to persuade Italy to delay its entry to EMU voluntarily, just as Greece declared last year that it no longer expects to be part of the first wave.

"Italy could join at the start if it wanted to, there is little doubt about that. But I would say to them: `don't do it, for your own good'," said one Bundesbank director recently.

Unfortunately for Bonn, Italy has shown no inclination to heed these words of advice and government ministers in Rome have continued to trumpet their confidence that it will adopt the euro in 1999. Besides, Germany's authority as EMU's chief gamekeeper has been undermined by doubts over its own chances of meeting the criteria for entry.

Rising unemployment is driving Bonn's budget deficit ever higher and many economists doubt that the government will be able to keep it below the 3 per cent limit laid down at Maastricht. Bonn is now pinning its hopes on a compromise that will delay Italy's entry to EMU until 2000 or 2001, 12 or 18 months after the currency is started.

This could save Italy the ignominy of being relegated to the second wave of entrants while allowing Dr Kohl to persuade Germans that the euro will be untainted by contact with the dreaded lira - at least for a while.