Euro born under cloud of compromise

Blair seals backroom deal over presidency of central bank but experts fear ferocious row could ruin currency's credibility

FOR Helmut Kohl, the driving force behind European monetary union, the historic decision at the weekend to merge the currencies of 11 countries into the euro from 1 January next year, should have been a triumph. But Mr Kohl left the European Union Council building early yesterday looking like a broken man, summing up what he had just lived through as "the most difficult hours I have experienced in Europe".

His government almost collapsed during the summit when his finance minister, Theo Waigel, rebelled after Mr Kohl appeared to bow to French pressure to politicise the European Central Bank. Kohl returns home to face elections in which he will be accused of reneging on a promise not to surrender the mighty mark - the potent symbol of Germany's post-war economic miracle - for a weaker money tainted by political interference.

It took 11 tortuous hours to cobble together the shabby backroom deal on who would run the central bank. But the fudged compromise now faces constitutional legal and political challenges which could still mar the euro's launch.

At US Senate-style hearings on Thursday furious MEPs may exercise their right not to confirm the appointment of Wim Duisenberg of the Netherlands to the bank's presidency in protest at the fix which appears to run counter to the terms of the Maastricht Treaty of splitting the ECB president's eight-year term.

The European Parliament President Jose Maria Gil Robles gave a sharp warning yesterday saying the 50-50 job share arrangement between Mr Duisenberg and Jean Claude Trichet of France is "clearly" in breach of the spirit of the Treaty. It was "no good at all" for the ECB, that it had been born in such a way he said.

Market economists believe that despite the eleventh-hour deal which Tony Blair insisted had safeguarded the "sanctity" of the Treaty, the ferocity and duration of the day-long row - one of the most bad-tempered summits in the EU's history - has done irreparable damage to the credibility of the institution which will decide interest rate policy for the Euro countries.

The problems Tony Blair experienced in knocking heads together to deliver the central bank, Europe's first truly federal institution, also reveal the depth of philosophical tensions underlying the whole project.

France and Germany still have profoundly different ideas about how European Monetary Union should be directed. The French fear that a powerful inflation- busting central bank unfettered by political supervision will squeeze job-creating policies and growth. It now looks as if the French have won the battle to have monetary control balanced by some political input.

What looked ostensibly like a squalid little row over which grey-haired man would pick up a pounds 180,000-a-year job goes to the heart of conceptual differences which, unless they are overcome soon, could tear the EMU project apart.

Nobody imagines that Mr Trichet, who will succeed the German-backed Mr Duisenberg at the bank's helm in 2002, will behave like a puppet of the French government. But the perception is what is considered damaging.

Feelings of ill will and bad blood, which augur badly for Europe's future unity, are running high among the EU's smaller countries. They were given a worrying reminder that EMU is a show run by the French and German governments. French President Jacques Chirac's demands were seen as provocative and nationalistic and were described as "out of touch" by the Irish Prime Minister Bertie Ahern after the summit.

The dispute showed in stark terms how domestic political concerns always come before the collective European good. Neither the French nor the Germans could be seen to lose face in the battle for control over EMU and the Dutch had little room for compromise because their prime Minister Wim Kok is facing elections.

But the rancorous feelings did not stop there. Luxembourg's Jean Claude Juncker, Romano Prodi of Italy, Jean-Luc Dehaene of Belgium and Viktor Klima of Austria - holed up for most of the day in one of the dining rooms on the top floor of EU headquarters - vented their anger at Tony Blair. Mr Prodi said the Prime Minister was "ill prepared" for his role as chairman, while others complained they were left in the dark as private discussions with the Germans and French dragged on for hours.