Euro's future thrown in doubt

Europe's projected single currency, which has already torn apart the Conservative Party and riven Germany, faced a fresh threat yesterday - France's new Socialist government.

At a meeting of EU finance ministers in Luxembourg, France refused to sign up to a pact which sets out economic rules for running the euro zone. The new French demands immediately fractured the increasingly fragile veneer of consensus between France and Germany about how the euro-zone should be governed, how "soft" or "hard" the new currency will be, and inevitably raised new questions about the timetable for monetary union - set to be launched in 1999.

The French move will cast a pall over next week's Amsterdam summit, when signature of the so-called "stability pact" for economic and monetary union (EMU) was to have been hailed by heads of government as a key achievement. Under the pact, countries which failed to keep within strict financial guidelines would incur heavy penalties. France called for a rewriting of the pact, with more emphasis on jobs and growth, rather than focusing exclusively on tight fiscal discipline.

Gordon Brown, the Chancellor, presented a British employment initiative to the Luxembourg meeting of European finance ministers, which appeared to support the French aims. He argued that jobs should be given new priority "at a European and national level".

Dominique Strauss Kahn, the new French finance minister, reassured partners that Lionel Jospin, the new French Prime Minister, is committed to the EMU launch on time, insisting that there was no call for "drama" or market panic. He also said France accepted the principle of budgetary discipline.

But the French government also wants to adjust the pact to allow the creation of a form of political "economic government" to act as a counter-weight to the monetary discipline to be imposed by the future European central bank.

Theo Waigel, the German finance minister, made clear he would oppose any move which could threaten the independence of the European central bank. Germany, which initiated the stability pact to ensure fiscal discipline, was also swift to signal yesterday that it would oppose any renegotiation of the rules, which might encourage a "soft euro".

But Germany's own governing coalition was showing signs of drifting towards the rocks amid rumours that Chancellor Helmut Kohl had threatened to resign four times last week, during the bitter argument still raging in Germany about the means by which the country can meet the Maastricht criteria for monetary union. The government failed in its attempt to revalue its gold reserves, and all its attempts to raise taxes are being thwarted.

The French announcement could not have come at a worse time for the European Union, which is already struggling to maintain a united front ahead of the Amsterdam summit.

Officials from the Netherlands, which holds the EU presidency, were last night working hard to cover up the cracks, by producing a deal which they hoped might satisfy the French ahead of the summit. There were strong hopes that Paris's stance might prove to be temporary posturing, in the light of pledges to promote employment made during the French election campaign. Senior EU officials said that if a satisfactory "form of words" could be found to accommodate French concerns, EMU could be swiftly back on track.

However, there were signs that the markets were already viewing the crisis as serious, undermining political damage-limitation. Furthermore, even if an accord can by stitched together in the short term, fundamental differences in philosophy about how the single currency should operate are now out in the open.

Euro fault-line, page 13