Blood pact that must end in gore

Europe's current timetable for a single currency will lead to political disaster, predicts David Marsh

"I am in blood stepp'd in so far that, should I wade no more, returning were as tedious as go o'er." Those sentiments - perhaps expressed in less poetic vein - were no doubt muttered to each other by President Jacques Chirac and Chancellor Helmut Kohl at their Majorca hotel retreat during the weekend discussions on the European Union's exchange-rate turbulence. Like Macbeth, both Chirac and Kohl have good cause to fear a tragic denouement if the Maastricht project for economic and monetary union (EMU) comes unstuck. France and Germany have invested so much capital in the single currency plan that for either of them to call it off now would be conceived as a disaster in Bonn and Paris, as well as in many other parts of the EU.

None the less, the events of the past week - the warning from the German finance minister, Theo Waigel, about the fitness of Italy, Belgium and the Netherlands for EMU, the stirring of trade union strife in France, and the run into the mark and Swiss franc - make it clear that the timetable to bring about EMU by 1999 is not feasible. The sooner Europe comes to terms with this uncomfortable truth, the better.

Currency troubles could soon spill over into a full-scale crisis centred on the French franc. The weakness of the franc may require the Bank of France to hoist interest rates in the coming weeks. Chirac and his prime minister, Alain Juppe, will be highly reluctant to countenance this step in view of the precarious state of the French economy and the threatened labour unrest. If France is forced to choose (like Britain in 1992) the alternative course of lower interest rates and a loosening of its links with the mark, the next few months may well echo to the disagreeable cacophony of European governments seeking to blame each other for the upset.

Part of the culpability does indeed attach to France and those other would-be EMU members who are still a long way from fulfilling the economic criteria (particularly on government deficits and debt) that were agreed in 1991 as determining the suitability of individual economies to join a single currency. The prime responsibility, however, for the EMU plan almost certainly having to be shelved lies with Germany, the country which (along with France) drove the Maastricht process to show that the new reunified Germany was just as reliable and committed to European integration as the old Western-oriented Federal Republic.

From Kohl downwards, the Bonn establishment has always supported EMU, essentially for reasons of foreign policy. Yet ever since the plan was hatched at the end of the Eighties, the German electorate has consistently shown that it does not want to give up the mark. Many ordinary Germans instinctively feel that a new European currency would be less secure than the one that has guided them for nearly half a century: the mark has become a badge and instrument of post-war stability and prosperity. The reticence of the public is shared by much of German industry, particularly small and medium-sized firms, although the big banks have supported the EMU idea so far.

Waigel's blunt remarks were simply the latest sign of Bonn's cooling towards EMU in the past few years. Kohl in Majorca did his implacable best to calm jangled European nerves, but German politicians have now fully grasped the mood of the burgher in the street. In a country as democratic as Germany has now become, no measure as significant and sweeping as the replacement of the currency can be undertaken without the support of the people.

To improve the EMU's public image, the government has attempted to introduce additional conditions governing German participation, going beyond the criteria written into the Maastricht treaty. Yet with each new requirement - first that monetary union should be accompanied by an (as yet undefined) form of political union, then that the European central bank should be in Frankfurt, then that the new currency should not be called the ecu, and now (as Waigel suggested last week) that the EMU debt criteria should be further toughened - with each of these the impression has grown that Germany is seeking to escape its treaty obligations. Ironically, while each new attempt to tighten the EMU screw has unsettled Germany's partners, it has done little to assuage the fears of the 75 per cent of the German electorate who, according to public opinion polls, oppose the single currency. The belief persists that the mark's fate will be a big and emotional issue in 1998 elections.

How did we get into this mess? It is essential to realise that, for many informed Germans, the writing has long been on the wall. Kohl received no shortage of advice that the Maastricht timetable was flawed in setting out a supposedly automatic process for the establishment of EMU at the latest on 1 January 1999. Karl Otto Pohl, then Bundesbank president, forecast as long ago as 1989 that the German population would show "considerable resistance" once they realised that EMU meant control of their money would pass abroad.

At the Maastricht summit in December 1991, Kohl's officials showed great unease at the "automaticity" of the EMU timetable railroaded through by then President Francois Mitterrand and Giulio Andreotti, the then Italian prime minister. One senior member of Kohl's entourage told me privately at Maastricht that the plan was a "time bomb"; four years later, his warning has been vindicated. In having pushed through a treaty that many senior Germans believed all along would be difficult or impossible to put into effect, the German government has laid itself open to charges of duplicity, or worse, by its partners. This is precisely the effect Kohl was most eager to avoid.

What happens next? The trouble with EMU is that it is both politically explosive and beset by pitfalls of great technical complexity, where each apparent solution grows into a Hydra's head of fresh problems. Bending the EMU rules to allow innocuous little Belgium to join, for instance, is difficult to manage because Italy (which the Bundesbank most firmly wants to keep out) could then claim it was being unfairly treated. Similarly, insisting that EMU can take place only with a small "core" group (of Germany and the Benelux countries, and possibily France) is convincing only up to a point. Such an outcome would not remove the threat of competitive devaluations, particularly worrisome to German industry, by countries such as the UK, Italy, Spain and Sweden.

The storm clouds over the Maastricht plan will almost inevitably force a postponement of EMU. Yet the subject will remain on European politicians' agendas, not least because the resulting economic turbulence will, if anything, increase the mirage-like appeal of the goal of currency stability. One lesson of the Maastricht saga, however, must be learnt. A plan that appears noble and persuasive from a foreign policy point of view, yet which is perceived domestically as countering a country's fundamental interests, is likely not to succeed but to scatter the seeds of mistrust and misfortune.

It may even end with the gory head of one of the protagonists being brandished, as was Macbeth's in the final scene of the play.

The author is director of European strategy for Robert Fleming, the London-based investment bank.