Franco-Italian Emu Tussle Refuses To Die Out

In an interview with the Financial Times, Prodi said a remarkably tough budget for next year would put Italy on track to dip down to the stringent deficit ceiling required for founder membership of monetary and economic union (Emu) in 1999.

If we do all this, it will be impossible to leave Italy out of monetary union, Prodi said.

His comments were published a day after a diplomatic storm with France after President Jacques Chirac, Prodi's summit guest, questioned Italy's chances of joining Emu from the start.

A senior German central bank official Hans-Juergen Koebnick also cast doubt on initial entry prospects for southern European nations on Wednesday in remarks likely to reinforce Italian suspicions that some of its partners would prefer to shut it out of the founding group of countries.

 

Italy's budget, unveiled last Friday, aims to lower the deficit as a proportion of Gross Domestic Product (GDP) to the magic three per cent required for Emu by slashing a huge 62.5 trillion lire ($41 billion) from next year's projected new debt.

The total, almost twice as big as Prodi had originally anticipated, includes some 25 trillion lire from a one-off tax for Europe and unspecified treasury operations.

Prodi defended those measures, noting France had also made special provisions in its 1997 budget to help meet EMU criteria.

If others carry out window-dressing we can do the same. If no-one does then we won't, Prodi said. If the French get away with it, then we can show them a trick or two as well.

Chirac incensed Prodi on Tuesday by telling businessmen in northern France that he doubted Italy would make the grade to join a core of EMU founder members in 1999.

A threat by Prodi to scrap their summit in Naples on Thursday night and Friday morning prompted a hasty retreat, with Chirac declaring later in the day that he ardently hoped Italy would join Emu from the start and praising his budget.

Senior Italian officials said Chirac had explained away his gaffe in a telephone call to Prodi on Tuesday night as a misunderstanding. The matter...is closed, one official said. But the summit is still likely to expose differences over the value at which the lira should rejoin the ERM grid, which it crashed out of in September 1992 in a currency crisis. Chirac has repeatedly blamed the lira's post-ERM devaulation for some of the export woes of French industry, including twice this week in speeches about the depressed textile sector.

His spokeswoman Catherine Colonna said France wanted the lira to rejoin the ERM soon but not at its current level, of around 995 to the German mark and 294 to the French franc. The movement of the lira in the past year is positive but it is no secret that we think there is still room for appreciation, Colonna said.