ONE of the most vexing issues in the preparations for European economic and monetary union is the method by which national currencies should be converted to the euro.
A consensus appears to be emerging among bankers - central bankers and otherwise - that the conversion rates should be announced in advance, either next May when European Union leaders hold a summit to decide who takes part in the first wave of the monetary union, or possibly earlier. But many details have yet to be worked out.
Mr Malcolm Levitt, EU adviser at Barclays Bank, has made a series of proposals to minimise the risk of attacks from speculators in the interim period between May and December 1998.
The conversion process suffers from a logical flaw, something which EU leaders overlooked when they drafted the Maastricht Treaty.
According to the treaty, conversion rates between national currencies and the euro must not be decided before January 1st, 1999, the scheduled starting date for EMU.
EU leaders have also agreed at a summit that the ECU, the basket currency of all 15 EU countries, should convert to the euro at a rate of one-to-one.
The system is inconsistent because there are countries, such as Britain or Sweden, whose currencies are part of the ECU, but which will probably not join in the first wave of EMU.
Mr Levitt proposes two escape routes out of the dilemma. One would be to redefine the ECU basket to include only future euro members.
However, this would require a potentially divisive and time-consuming change in the European treaties.
His second suggestion is to pre-announce the bilateral conversion rates and then fix those rates permanently.
This suggestion builds on a proposal by four economists ill all influential discussion paper earlier this year. They said the bilateral rates should be pre-announced and the currencies then left to float freely into the euro without exchange-rate bands.
They argued that restrictions would only invite the speculators.
Mr Levitt takes issue with the free-float part of the proposal. He says: "This is the most attractive option considered so far, but if the set of participants itself is not credible in the view of the markets, turbulence would occur anyway."
He then goes on to suggest: "Why not announce next May that. . . currencies are locked from that moment? Willingness to accept such a rule would be the acid test of the credibility of the set of countries selected."
A hint that financial markets may be looking to profit from the uncertainty came in a London seminar last week. Mr Tony Norfield, head of treasury research at ABN-Amro, said that a pre-announcement of bilateral conversion rates "could lead to dramatic arbitrage trades in European financial markets".
Interest rates had not fully converged, he said, and the rates of the Irish pound and the Italian lira were particularly vulnerable.
