Plenty of twists face states intent on the road to EMU

EUROPEAN financial markets and politicians are at one at the moment in predicting that monetary union will go ahead on schedule in 1999. One result of this consensus has been a rush of money into the Irish Government bond market and into other markets seen as likely candidates for phase one. Another has been a scramble among countries across the EU to get their economies ready to meet the Maastricht criteria next year.

But the path to monetary union is not likely to be as smooth as either the markets or the politicians believe. And the big problem in the coming months is going to be the conflict between the political drive to have as wide as possible a membership of monetary union and the economic arguments for a smaller grouping.

Already there are some straws in the wind of the uncertainties ahead. A row is already brewing about who will be in the first group to join monetary union and who will be out. Italy, Portugal and Spain are among those striving to get their economics in order to join and even France has had to resort to some imaginative budgetary manoeuvres to attempt to get its 1997 deficit below the threshold of 3 per cent of GDP set down in the treaty.

Bundesbank president, Dr Hans Tietmeyer, crystallised German fears about such shenanigans when he said that states Joining monetary union should have a culture of stability and not get in just because they made a "breathless short term effort". However, the Germans are having their own struggle in matching all the criteria.

The German government may take a somewhat different view from the Bundesbank, but will also realise that its public may be sceptical if the membership of EMU includes states with a record of currency weakness and budgetary instability.

From a political point of view, the selection process for EMU promises to be very difficult. The Maastricht Treaty leaves just enough leeway for argument in setting down the budgetary and debt rules which aspirant members of monetary union must meet. And if the rules are interpreted leniently say, for example, for France, then why not for Italy and Spain?

Taking a tougher line on the Maastricht rules would lead to a smaller initial grouping. But it would lead to a major row at political level, possibly pitting southern Europe against the northern states. If it looks as if a political consensus cannot be reached, the question of delaying the start of monetary union will again raise its head.

The financial markets will closely watch such developments and bouts of EMU optimism and pessimism can be expected. This could lead to some instability.

Watch for problems, for example, if a large group of international investors all decide at once to try to off load some of their holdings of Irish Government bonds. The market is relatively illiquid and would struggle to handle a large sell off.

It is one thing for investors to believe that political determination is inevitably driving Europe towards monetary union. But over the next year they will also focus on the economic uncertainties of trying to tie together a range of diverse economies through a single currency.

The economic arguments for and against monetary union are, at this stage, well rehearsed. And the case "for" is far from clearcut. The very least that can be said is that the project brings with it considerable risks and that implementing a single monetary policy for a diverse group of economies will be no easy task.

Nor is it clear how realistic are the current proposals to try to control the budgetary performance of EMU member states. So the drive towards monetary union stems from political rather than economic considerations and, specifically, from the French and German desire to push towards a single currency for their own reasons.

Even politically, a major problem looms in judging who will be "in". Despite the current optimism, there are still some big hurdles to jump on the road to monetary union.