Europe braced for radical shift on euro

Poll win for Jospin will strengthen lobby for `soft' currency

Europe is braced for a radical shift in the debate over future European integration and the construction of the single currency if the French socialists emerge victorious from Sunday's elections.

Lionel Jospin, the French socialist leader, who could be elected Prime Minister, would support a flexible interpretation of the Maastricht convergence criteria, allowing as many countries to join the euro-zone as possible.

Such an approach is certain to bring about a "soft euro", removing any doubts that both Germany and France would be able to meet the time-table for launch on 1 January 1999. The countries' difficulties in meeting the key budget deficit target of 3 per cent of gross domestic product would be removed by a political decision to allow them to exceed the limit by a few percentage points.

A "flexible" policy on the criteria would also open the way for Italy, and other marginal applicants, to join monetary union in the first wave.

Mr Jospin would insist on building up political control over the operation of monetary union in order to reduce the power of central bankers, allowing greater emphasis on promoting employment and growth.

The French socialist approach would put EMU watchdogs in the European Commission, who have repeatedly stated that the criteria would be strictly adhered to, on the defensive, creating a field-day for the sceptics who would accuse Europe of manufacturing a "fudge" in order to set up the single currency.

More dangerous, for the Euro's future, reducing the rigidity of the economic rules would run the risk of fuelling already intense public opposition to the single currency in Germany. Most ordinary Germans fear the prospect of sinking their strong mark into an inflation-prone soft currency.

Helmut Kohl, the German Chancellor, whose own difficulties in meeting the criteria were illustrated in the row over the revaluation of German gold reserves, would face a tougher task than ever as he attempted to maintain backing for his pet EMU project in the run up to German elections in late 1998.

However, calls for a more flexible approach to the single currency, along the lines suggested by Mr Jospin, have been growing across Europe.

The rigidity of the EMU convergence criteria, which demand strict control of public spending in each member state, has caused mounting public anxiety in several member states as the painful social effects of budget cutting has been felt.

Gordon Brown, the British chancellor, has opposed any "fudging" of the criteria, and the Labour government's view of a "social Europe" is at odds with the French socialists.

However, Britain has signalled its desire for more political input into European economic policymaking, by backing the inclusion of an employment chapter in the Amsterdam Treaty, and signing up to the social chapter.