EMU spotlight on German gold

The EMU spotlight shifted from French elections to German gold this week, after apparent moves by Germany to use its reserves to fudge the size of an embarrassingly large deficit. The problem was thrown into sharp relief by forecasts from Germany's tax commission suggesting that government revenues were likely to undershoot expectations by DM18bn (pounds 6.5bn) this year, some DM10bn more than the finance minister, Theo Waigel, predicted in January when he revised up his public deficit expectation to 2.9 per cent of national output.

With German unemployment also beating expectations, analysts quickly revised up their forecasts for this year's deficit to around 3.5 per cent, well clear of the Maastricht target of 3 per cent. That left red faces all round in Bonn, given Germany's previous insistence that there be no divergence from convergence for laggards such as Italy and Spain. The embarrassment is made all the worse by yesterday's move by Spain to cut its official interest rate by a quarter point, which some of our panel of economists said reflected its increased chances of joining the first wave of union.

But interpreting the German move on gold is not entirely clear cut. Robert Prior at James Capel suggested it could cut both ways for EMU. Any move by Mr Waigel to use revalued gold reserves to offset public debt would only play into the hands of the Italians, who the Germans are reluctant to see join any early common currency, but are also on course for a 3.5 per cent deficit. "They have complained about Italy's fiddles and if they are going to start fiddling themselves it will strengthen Italy's hand," Mr Prior said.

Michael Lewis of Deutsche Morgan Grenfell pointed out that the gold story was not new, as Belgium and Holland have been selling their reserves for years in an attempt to meet the convergence criteria.