Germans force EU to face the truth

THE GERMAN finance minister, Theo Waigel, thinks Italy will not participate in monetary union. Mr Waigel thinks the new European currency should be called the Euro. He also thinks that other countries must cut their budget deficits further if monetary union is going to satisfy financial markets.

From these statements, and the furious reaction to them that has seized markets and governments alike this week, you might conclude that monetary union is a German plot, designed and organised from Bonn and Frankfurt. And you would be wrong.

Indeed, as EU ministers met this weekend to try to put their plans for Europe back on track, the very idea of design and organisation are starting to look a little patchy. The architects of a single currency are trying to work out how to placate the financial markets and their expectations, while keeping their electorates behind them, and it is not proving easy. If there is a plot here, then it eludes the 15 heads of state and government gathered in Majorca.

The events that began the turmoil in the markets began with some comments from Mr Waigel in a private meeting which appeared in a German newsletter on Wednesday. Mr Waigel had said that Italy would not meet Maastricht's demanding economic conditions for entering a single currency in 1999, and cast doubt on whether Belgium or the Netherlands would make the grade either. His remarks horrified Italy, and sparked a furious row as Germany came under strong pressure to retract.

Mr Waigel, who sports the finest pair of eyebrows worn by a finance minister since Denis Healey was in 11 Downing Street, is known for his candour. Similar things had been said before, in seminars, conferences, and off- the-record briefings, but never directly by someone of this rank. However, it was not this alone which gave his words such an impact.

The markets reacted to Mr Waigel because he was telling them something that went clearly reflected German policy and sentiment. For several weeks, Germany has been letting it be known that without tougher fiscal standards, monetary union won't work and the Germans would not stand for it.

Mr Waigel represents Bavaria's Christian Social Union, and down in the wealthy South, they are not looking forward to seeing their beloved Deutschmark clipped with the European "E". Even the opposition Social Democrats share this fear, arguing for tougher rules to keep their EU partners on the road to fiscal rectitude. "The Maastricht treaty is insufficient on this point," said Gunter Verhuegen, the SPD party manager. Far from seeing EMU as a German plot, Germans see it as a trick foisted upon them, and they feel duped.

There is another reason, too, why the weight of these remarks was so considerable: they are true. Italy's chaotic government finances are way beyond the limits set by Maastricht, and it would take a mixture of imagination and bare-faced cheek to pretend otherwise. Nonetheless, that is what everybody has been doing for the past four years. This week has, partly, been an exercise in truth-telling.Creating a single currency will cause pain, and there has been a great effort to brush this under the carpet.

This week, for instance, Austria, the Netherlands, Spain, France and Italy have all been putting their 1996 budgets in place, and it has been a process of cutting and saving to make the Maastricht deficit targets stick. Germany's belief that some countries will not keep up the struggle is rooted in fact: the evidence suggests Italy will not cut enough, in time, from its budget to make the grade. Yet can a single currency go ahead without a founder member of the European Union?

But this fiscal surgery is divisive in other ways. In France, the public sector feels that it is being cast into the darkness to make way for tax and spending cuts, its payrolls slashed and its wages capped to keep the country solvent. High unemployment does not make an easy partner for the fiscal triage that is being undertaken in Paris. Announcing budget cuts this week, President Chirac said: "The questions are simple to formulate, and terrible to answer."

It is possible to see all this as simply part of the process of creating monetary union, a wrenching if positive movement towards the goal that the EU has held so dear since the 1970s. But it may be much more than that: a psychological moment where the divisive and painful effects of the whole project become clear. That is why John Major was so glad to remind the Majorca summit that he had been urging the New Euro-Realism on everybody for some time, and that is why this time he got a hearing.

But it is not Britain which will prove decisive in this debate. Germany has yet to make its European partners feel that it really wants monetary union as soon as possible - because it doesn't. Bonn has repeatedly said that it would prefer to prolong the timetable beyond the end of the century rather than see the economic solidity of the project undermined.

Then there is Paris. If one country can be said to be behind EMU it was the France of Francois Mitterrand, but that is past. The France of Jacques Chirac may yet turn out to be a very different country.

The pre-election wrangling between Mr Chirac and the then-Prime Minister Edouard Balladur, the anti-integrationism of the influential Philippe Seguin and the acrimonious and early departure of economy minister Alain Madelin, all point to deep disagreements within the French government over economic policy, monetary union and Europe.

There is a public sector strike planned for 10 October. It remains to be seen if Mr Chirac can keep his troops in order.