EU split leaves markets in chaos

SARAH HELM

Majorca

DIANE COYLE

and TONY BARBER

An acrimonious quarrel over Europe's plans for a single currency set EU leaders at each others' throats yesterday as turbulence once more gripped the world's financial markets.

The 15 heads of state and government gathered at a luxury hotel on Majorca for a summit that had been billed as a time for thoughtful, long-term planning but has been overshadowed by doubts about Germany's commitment to a single currency.

John Major took advantage of the confusion to spell out Britain's deep uncertainties over the project. He warned his European partners of the danger of a "Europe divided in two" if some countries adopted a single currency while others did not. The Prime Minister said it was now quite clear that "a large number of countries" were not going to meet the necessary economic targets in order to qualify for economic and monetary union (EMU).

"What happens if a small core decide to go ahead and the larger core remain outside? That raises a whole series of questions not yet addressed by the European Union, and which need to be addressed," Mr Major said as he arrived in Majorca. British officials suggested that Mr Major may now be prepared to question whether the 1999 target date for monetary union should be revised.

The disarray over EMU has dismayed Jacques Santer, the President of the European Commission, who yesterday warned that opening up the debate would undermine public confidence in the entire project. The EU row started last Wednesday when Germany's Finance Minister, Theo Waigel, predicted that Italy would fail to qualify for monetary union in 1999. Mr Waigel told Germany's upper house of parliament: "We consider it most important that no one should get the impression that Germany wants to dominate others as the strongest economic power." But the financial damage had already been done.

The lira plunged again yesterday to a low of 1,135 to the mark. Aggrieved Italian politicians and commentators accused Germany of arrogant behaviour and the influential Milan daily Corriere della Sera published a leading article headed "The German Toad".

The French franc fell from 3.45 to 3.47 to the mark yesterday as dealers expressed concern about the French budget deficit and as unfounded rumours of the resignation of the Prime Minister, Alain Juppe, circulated. The pound, Belgian franc, Spanish peseta and Portuguese escudo, also sank against the German mark.

The position of the smaller European currencies has been undermined by the weakness of the US dollar. Intervention yesterday by the Bank of Japan to buy US$5bn - a record for one day - only brought temporary relief to the US currency. Share prices on Wall Street fell sharply when trading began, taking stock markets in London and continental Europe with it. Alan Greenspan, chairman of the US Federal Reserve Board, later calmed the US market with an optimistic assessment of US economic prospects.

Leaders at odds, page 10

Markets in a spin, page 19