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Nagging Questions on EMU


European Commission

report today effectively inducted the full set of 11 countries into the EMU project set for launch on Jan. 1, 1999.














, the








. Only the








are to be excluded from the first round. Technically speaking, the report is only a recommendation, with final approval for the gang of 11 due in the first week of May.

None of this is exceptional news. But the report did do one thing -- it resurrected the debate on whether there is a firm requirement that a currency must successfully participate in the Exchange Rate Mechanism ("ERM") for two full years before it can be admitted to EMU. ERM membership before full EMU status is required by the Maastricht treaty. And the commission's report today explicitly rules out Sweden because the krone has never participated in the ERM.

The ERM is the system of floors and ceilings on intra-European currency fluctuations. This system was the cause of the big currency crisis in 1992 when sterling got thoroughly trashed (and


made the famous billion dollars).

If Sweden can be kicked out now, why can't the same thing happen down the road to the U.K.? Sterling is thought to be a possible second-round admission in 2002. Does today's report mean that sterling must go through the paces of rejoining the infernal mechanism if it is to keep open its option to join in 2002? This horror was not lost on the


government. They immediately put out a series of denials, telling that there is no plan for putting sterling back into the ERM.

Over the years, the U.K. has put out the argument that the ERM has had no practical significance since the European currency crisis in the summer of 1993. At that time the ERM currency fluctuation bands were widened to 15% (up or down). In other words, any ERM member currency could fall by as much as 30% (ceiling to floor) against the other member currencies and still not be in violation of the ERM price fluctuation limits. As a point of reference, the precrisis bands were 2.25% (up or down). Discredited and defanged. A mere technicality then?

Meaningless or not, EU Commissioner De Silguy was on the wires this morning saying that ERM membership is a must. If the rest of the EMU mandarins insist on this, then the Blair government has a lot of thinking to do.

Meanwhile, sterling is turning heads with its seemingly unstoppable strength. And no wonder, because the

Bank of England

has been biased for some time in favor of raising interest rates. Moreover, support for even tighter money is coming from a growing gaggle of economists in London. The key question then is this: ERM or no ERM, should the U.K. entertain going into the Euro in three years' time at levels even close to these high values?

The Greens Weird Out on Schroeder

Things are getting complicated for the German


party. As I wrote on

March 2, SPD's man

Gehard Schroeder

has taken on the mantle of the his party's leadership in its move to unseat

Helmut Kohl

in the September elections. The hitch is that Schroeder's party is unlikely to get an absolute majority win. The most likely case is that he will need to form an alliance with another party to form a coalition government. And the other party may have to be the infamous



Recently the Greens have been causing quite a stir. Some question whether they are so radical that they can't be trusted to participate in running a government. The most incendiary of their ideas concerns steps they want to institute to curb energy usage. One is to raise the price of gasoline about three-fold. Another is to raise the rice of jet fuel. Some comment was made to the effect that there is no necessity for Germans to use an airplane to go on vacation. Try as much as he can to look like a centrist, it seems that Mr. Schroeder still carries baggage from the left. This is good news for Mr. Kohl.

Quotes of the Day

Paul Krugman

, the prominent


economist who is always game for a spat, is giving it but good to

Steve Hanke

over his support of the Indonesian currency board. In a speech in Hong Kong Krugman referred to the currency board project as a "snake-oil" prescription for Indonesia being touted by the "rupiah Rasputins."

What should Indonesia do? Krugman says Suharto should resign, for starters. Then the country should "clean up the banks, clean up stockholders, even if they are closely affiliated with the president, recapitalise, and also be clear about the realistic prospects for the economy." Rupiah Rasputins. That's the best one from Krugman since he dubbed the Southeast Asian currency contagion effect last summer "baht-ulism."

David DeRosa heads a trading research firm and is an adjunct professor at the Yale School of Management. His column on international finance and trading appears Mondays, Wednesdays and Fridays. He welcomes your feedback at