Mitterrand clause returns to haunt EMU hopefuls

IN December 1991, in Maastricht, the late Francois Mitterrand, then French prime minister, succeeded in getting a vital clause inserted in the treaty which bears the name of the Dutch city. The leaders had agreed that the single currency would go ahead in 1997 if a majority of states were ready. But on the insistence of the French, they agreed that, if it did not go ahead on that date, the single currency would be introduced automatically on January 1st, 1999, in all states which met the rules, no matter how few they were.

A little over five years later, the importance of the ticking clock which started running in Maastricht is fast becoming clear. According to the treaty, the single currency must come into being in less than two years time.

Were the rule that a majority must meet the criteria to have applied in 1999 as well as in 1997, postponement might easily have been achieved. As it is, the smart money must be that the project will go ahead on schedule in 1999. However, given the political and economic hurdles still to be crossed, it now looks likely that EU governments face some very testing times before they enter the euro winner's enclosure.

Just what type of "crisis" may be in prospect is hard to predict. But consider what lies ahead. At the moment, the EU governments and central banks are able to shrug off queries about the likely membership of the first group moving to monetary union, pointing out that the decision will be made, all in good time, early next year.

But by the second half of the year, speculation will reach fever pitch. Economic figures from all the prospective members for the first half of the year will be available and it is likely to be clear that many will be struggling to meet the criteria set down in the treaty.

Every word said by a government minister or central banker will be analysed for hidden meanings on who will be "in" and who will be "out".

Politically, the heat is also likely to be rising and most of it will surround Italy. Put simply, Germany is not likely to accept that Italy has the record of stability necessary to be a first round member, while the Italian government, possibly with French support, will strongly argue otherwise. It is hard to see a way around this problem - there have been some suggestions tat Italy might be given a promise of joining in a year or two, if its economic performance continues to improve, but such a deal would be very hard to strike.

It has the makings of a major political problem and one which will surely be reflected in the financial markets. Speculation now against currencies is not as lucrative as it was when the narrow ERM band was in existence and central banks were obliged to keep currencies within it. But speculators are likely to test the resolve of the Italian authorities to lira stability, while an attack on the link between the French franc and the deutschmark at the heart of the system cannot be ruled out.

The heat will rise further moving into 1998, the year when the decision will be made on who will qualify. In April next, the EU Commission and the European Monetary Institute (EMI) will report to EU governments on who they believe should qualify.

The final decision rests with the heads of state, but the European Parliament will be given a month to study the Commission and EMI reports, which are both likely to be published. Consider, for a moment, what happens if the EMI and the Commission differ on who should be "in", or if the central bankers disagree among themselves and, as seems likely, the minority opinions are published.

Ireland appears likely to join if monetary union goes ahead. We meet most of the rules and the recent movement of the pound away from the other currencies in the ERM band is likely to be overlooked on the basis that the currency has gone up and not down. So the pound is unlikely to be a target in itself, although we could suffer in any upheaval.

EU leaders may well overcome whatever trials are sent to test them. But their faith will be tested in the months ahead, as the clause inserted by the late Mr Mitterrand at Maastricht finally comes into play.