The Final Countdo

A few weeks back, there were some doubts about Italys participation as the Prodi government was defeated in Parliament on its budget proposals, with its leftist coalition partners refusing to support the austerity measures. This raised questions about Italys ability to meet the criteria. However, because of a massive adverse popular reaction on the fall of the government, the left had to hastily backtrack on its position and re-join the Prodi-led government. Italy now seems to be well on track to be among the founders.

When the German Bundesbank raised interest rates recently, many other European central banks followed suit so that they could equalise rates. In fact, Germany, France and the three Benelux countries have an identical short term rate of 3.3 per cent, a sixth, Austria, is very close at 3.2 per cent. The interest rate congruence is also taking place at the long end. Ten year bond yields in most currencies are very close.

For some time now, JP Morgan has been calculating and publishing periodically a probability table of EU countries joining the single currency. The probabilities are calculated on the basis of the quotation in the interest rate swap market for various currencies: since swap rates are market determined, this serve as a reasonable proxy for market expectations. Since a single currency without the participation of Germany is unthinkable, therefore it has been given a 100 per cent rating. In the latest data, France, the Benelux countries and Ireland also merit the same probability. The remaining countries out of the 11, also rank in the eighties and nineties. As far as the financial markets are concerned, the single currency seems to be a done deal.

As for exchange rates, while most are ruling fairly close to their ERM