Looking for leadership along the road to EMU

THINK things are beginning to liven up on the road to monetary union? Well you ain't seen nothing yet. The row over the German gold reserves and the uncertainty over the French attitude to monetary union are just symptoms of the problems facing states in the move to the single currency. For Europe's leaders have yet to convince the public that what is essentially a politically motivated project can yield an economic dividend. And, as we saw during the currency crisis of late 1992 and early 1993, when politics and economics collide, the results can be explosive.

Speculation on whether monetary union will go ahead on time and, if it does, how the new euro will perform, is already intense. Imagine how frenzied it will become over the rest of this year as the markets begin to look forward to the key decisions to be made in spring of next year on who will join monetary union and to try to second guess the rate at which currencies will be locked into that union.

The crux of the problem facing policy makers is that, having set the rules in the Maastricht Treaty for states wishing to qualify for monetary union, it is now clear that few will precisely meet the criteria. France and Germany are among those struggling to meet the 3 per cent deficit target. It is far from clear how the German government is to meet the 3 per cent figure. And the new government in Paris is to undertake an audit of the public finances, which is likely to show that the deficit could be 3.2 per cent to 3.3 per cent this year.

If the rules are bent to allow France and Germany to join - so the argument goes - a wide range of other states will also be able to press their credentials for membership, even though they may not precisely meet the rules. This could mean that the euro gets off to a weak start as some members will be in a weak budgetary position. In response, the EU central bank might be more inclined to maintain a high interest rate regime to try to give credibility to the new currency.

A key hurdle lies ahead. Later this month, at the Amsterdam summit, EU leaders are due to discuss the draft agreement reached in Dublin last December on the rules governing member states of the single currency - the so called stability pact. The new French government is not happy with this pact, but Germany is unlikely to agree to any weakening of its terms. Whether a damaging clash can be avoided remains to be seen.

The latest events are symptomatic of an underlying political problem. The monetary union project has still to be sold to the people of Europe. The German people, as shown in their support of the Bundesbank line in the gold row, remain deeply concerned about giving up the deutschmark. Meanwhile, the French election shows that the public there are fed up with talk of austerity to meet the Maastricht guidelines.

If Europe's leaders are serious about the project, they need to start showing some leadership. They must make it clear that the decision on qualification for the single currency will be based - as the treaty allows - on those who can sustain a solid economic performance over a period of years, and not on whether the 1997 deficit is 3 per cent or 3.1 per cent. And they must then work to make it politically acceptable for some states to stay outside.

Both the leaders and the member governments need to give serious consideration to how member states adjust for different economic conditions once inside monetary union, a key problem which has never been adequately considered.

Finally, EU leaders need to decide what' to do if enough states do not clearly meet the Maastricht rules. This week former EU Commissioner, Mr Ray MacSharry said it would be better to delay for a year than to proceed under such circumstances.

During the months ahead, clear leadership will be needed. If the EU leaders sit back and cross their fingers, they are inviting a rerun of the kind of crisis of confidence which caused turbulence in currency markets in 1992/93, and which could yet threaten the entire monetary union project.