Financial Reality Intrudes on Single Currency Dream

PARIS -- In the European Union's drive for a single currency, the irresistible force of political reality has finally hit the seemingly immovable obstacle of financial rectitude.

In France, discontent over tax hikes, spending cuts and unemployment, partly due to the terms for economic and monetary union, has swept away Prime Minister Alain Jupp?'s government in an election and may well put the left in power next Sunday.

In Germany, the conservative government of Chancellor Helmut Kohl has clashed with the mighty Bundesbank, the independent central bank, in its drive to use accounting devices rather than more unpopular austerity to meet the single currency criteria.

The Bundesbank on Wednesday sharply rejected Kohl's plan to use a revaluation of its gold reserves to help qualify for EMU. The Bonn government said it would go ahead anyway.

Bet on politics to prevail in both countries -- and on the single currency starting on time in 1999 anyway.

In France, both the opposition Socialists, led by Lionel Jospin, and the new champion of the center-right, social Gaullist Philippe Seguin, support a flexible interpretation of the Maastricht treaty rules for launching EMU.

Rejecting further austerity to meet the criteria, Jospin says they should be interpreted as a trend, as the Maastricht treaty allows, to allow countries such as Italy and Spain to join from the start.

Seguin said this week it was "masochistic" to insist on a strict 3 percent limit on public deficits in a time of slow economic growth, adding that he hoped the "straitjacket" would be loosened once the German public had accepted the euro.

And the outgoing Jupp? has stressed that the choice next year of which countries qualify for the start of the single currency will be "a political decision."

In Germany, Finance Minister Theo Waigel still says he wants a strict interpretation of the criteria, including the 3 percent deficit limit.

But Bonn said Wednesday it would go ahead with a plan to revalue the country's gold and currency reserves to give public finances a much-needed cash injection despite the Bundesbank's strongly-worded warning that it could violate the Maastricht treaty and set a bad example to others.

"The negative knock-on effects on the interpretation of the entry criteria and the stability policy credibility of the selection of participants in May 1998 would scarcely be avoidable," the Bundesbank statement said.

European diplomats said it would not be the first time Kohl had overruled the Bundesbank, whose lecturing to other countries about cosmetic accountancy has irked many European governments.

"Kohl overruled the Bundesbank in 1990 on the parity between the West and East German marks upon German unification, and he will overrule the Bundesbank again this time," said a senior diplomat.

French government officials have studiously avoided comment on the debate.

Initially, some voiced a mixture of relief and what Germans call Schadenfreude, delight at others' misfortune.

But as the German row has grown more serious, policy-makers in Paris are avoiding even private comment, aware that a Bonn-Frankfurt divorce might threaten the whole EMU project.