Wilhelm Nölling: The test tube currency FT 97-05-19

During his election campaign, Mr Tony Blair, the new UK prime minister, successfully built his quest for credibility around two words: "Trust me." With the best will in the world, I do not believe that the future president of the European central bank, on present plans, could pull off a similar achievement. Applied to the euro, these words would ring profoundly hollow.

The Maastricht plan for the euro is an experiment full of unprecedented risks. It tampers with a fundamental pillar of economic management, namely people's trust in the value and the proper functioning of their own money.

According to the timetable, in just over 18 months the euro will be with us. Yet it is not too late to avert what could be a financial and political fiasco. The best solution would be to postpone the project. We must take a fresh look at how the European Union could move towards a single currency without the dangers and dissonances that have dogged the Maastricht project.

If the plan for European monetary union were really as simple, as risk-free and as advantageous as its protagonists claim, I would be in the vanguard of those fighting to introduce it on time. Unfortunately, this project has more "ifs" than Rudyard Kipling's celebrated poem.

Under the Maastricht plan, a number of internationally traded and held currencies that have a high degree of stability and confidence are to be replaced by a new artificial unit, the euro - the ultimate test tube currency.

Many people believe most EU members will start Emu, as planned, in January 1999. Such predictions may turn out to be wholly misplaced. It is worth enumerating the many reasons for doubt.

First, the unpopularity of Emu in Germany, which would have most to lose if Emu failed, cannot be ignored. Popular scepticism about the German government's Emu policy has increased since Maastricht was agreed in 1991. This has political consequences that could cast a shadow over Chancellor Helmut Kohl's bid for re-election next year.

Second, European politicians made a grave mistake by pushing forward a fundamental change in monetary arrangements without any new political institutions.

Monetary union needs to come after political union, not the other way around. In fact, there have been only desultory steps towards political union, and anything more concrete in coming years is most unlikely.

Third, in the absence of political union, politicians are preparing to set up a fully independent European central bank without any constraints and countervailing political force.

Possessing the power to set uniform interest rates and determine inflation rates throughout the euro area, and tied to no other obligation than the maintenance of price stability, the central bank will be uncontrolled and uncontrollable - a monetary version of George Orwell's Big Brother.

Pressed by the Germans, EU governments have agreed a stability pact designed to rein in budget deficits after monetary union, but this is a wholly unsatisfactory approach.

The stability pact will not produce the "automatic" sanctions on deficit-running governments that German devotees of monetary stability desire.

It will force governments and parliaments to take into account the strictures of the European central bank in running their budgetary policies. Yet there is no mechanism for redistributing fiscal resources between the richer members of the single currency area to the poorer ones.

Fourth, people throughout Europe are likely to focus attention on the need for monetary union to be accompanied by much more mobility and flexibility on labour markets. This is necessary, but not popular. If it becomes evident that Emu is being used as an instrument to push through painful free market reforms, this could lead to an electoral backlash and the eventual unravelling of monetary union.

A fifth source of problems stems from the colossal technical and organisational challenge and huge costs of preparing for Emu. In many important areas preparations are falling behind what is required. Businesses are uncertain whether monetary union will take place and in which countries.

In Germany, public sector bodies responsible for huge volumes of transactions are wholly unready for the euro. Many larger banks are making well-publicised preparations, but smaller ones are lagging behind.

Perhaps most important of all for the euro to see the light of day, the celebrated "convergence criteria" will have to be met with considerable precision. Europe has had some success in bringing down inflation and stabilising exchange rates. But there has been a sensational degree of upward harmonisation in unemployment and public sector debt.

Germany's public finances, meanwhile, are stretched to the utmost. We face a disturbing fall in revenues - underlined by last week's forecast of an DM18bn (£6.4bn) shortfall in tax receipts this year - and a continued need for large transfers to east Germany plus steep increases in payments for social welfare and unemployment. All this increases public debt.

Bonn is making increasingly desperate attempts to find a way round the problem, for instance by possibly revaluing the Bundesbank's gold reserves, thereby printing money, or selling further shares in Deutsche Telekom. Regardless of these measures, over the next decade Germany will find it most difficult to meet the key Maastricht requirement of sustainable fiscal stability.

There are two possible outcomes to the dilemma. Neither would help the euro. If governments step even harder on the fiscal brakes to achieve the budgetary criteria in 1997, that will cause pain in many countries, confirming fears that Maastricht's main effects are highly deflationary.

Yet if governments try to bend the criteria through manipulating statistics, that will endanger the stability of the new currency. It would almost certainly trigger a lawsuit at the German constitutional court. I have already made clear that I would launch such a legal process if I believed that the single currency was to be introduced on an unstable or unsustainable basis.

Politicians throughout Europe may derive help from the elections in France and in Britain. In France, the tensions brought to the surface during the campaign, and the eventual outcome of the election, may prove helpful in steering the right choice for the euro.

In Britain, the new government's decisions to grant the right degree of independence to the Bank of England may prove constructive in re- establishing much-needed British influence on European affairs. UK-style operational central banking independence leaves overall anti-inflation policy in the hands of the government. This is clearly superior to the Maastricht model for a European central bank. Britain, Germany and France might this year have a joint interest in postponing Emu.

That would provide breathing space for Europe to improve its underlying economic performance and restart the journey towards a single currency. Emu is supposed to last for decades, if not for centuries. Spending a few more years to ensure it proceeds on a sound basis would be an eminently sensible use of governments' time.

The author, a professor at Hamburg University, was president of the Hamburg Land central bank and a member of the Bundesbank council between 1982 and 1992