G7 to debate EMU

The battleground for the UK election spills over into Washington today, where the Group of Seven (G7) holds its six-monthly meeting of finance ministers and central bank chiefs.

Although not on the formal agenda, officials will be engaged in intense debate about the outlook for European monetary union. And with two of its members engaged in elections, the topic will be especially sensitive.

The snap French election, announced last Monday, has been seen as a massive gamble by President Jacques Chirac. He hopes it will restore his right to power, with monetary union firmly ensconced as a certainty.

The reality, however, could be somewhat different. An opinion poll on Friday gave the French leader no more than a wafer-thin lead. If the socialists, under Lionel Jospin, are able to combine with the Communists and win, there is every possibility of an entirely different version of European Monetary Union being proposed. Italy would be included in the first wave of entrants, and various commitments would be extracted from Brussels on issues such as a minimum wage.

"The French election is a watershed for EMU," said Giles Keating, economist at Swiss investment bank CSFB.

"If the right win, it will see EMU arrive on time, with a core group. But if the socialists win, it will signal a very different EMU, and the tone of it will be radically different. It will still happen, but it will leave a lot of people in Germany distinctly unhappy, and will push the whole thing down a much more rocky road."

The UK, with a distinct prospect of a Labour victory, will almost certainly be watching from the sidelines. Tony Blair has said that the Cabinet must be in agreement, and then Parliament has to approve it, before it will be taken to the British public for a referendum.

On that timetable, it is unsurprising that Labour's shadow foreign secretary, Robin Cook, has been muttering about EMU being inconceivable in the lifetime of the first Parliament - taking it through to 2002 before Britain joins.

Eddie George, Governor of the Bank of England, who is representing the UK in Washington today, has already stated his opposition to Britain joining by the start date of 1 January 1999.

At the last meeting in October, there was much talk of the euro replacing the dollar as the reserve currency - that held by central banks to back their national currency.

The state of the dollar, which will also be discussed at G7, will also have a critical bearing. There is expectation that something will be done to arrest the dollar's rise against the mark, which will help the Bundesbank to reduce its interest rates. That will be essential for EMU to proceed, on the basis of further fiscal tightening required in Germany and France.