Multiple-choice quiz: Prospects for a single European currency being formed Jan. 1, 1999, are: a) very good; b) mixed; c) unlikely; d) unfathomable.
If you can't make up your mind, don't worry: neither can the investment community. Attitudes toward whether the European Union will succeed in creating economic and monetary union by its scheduled date range all over the lot.
The 18 billion guilder ($11.2 billion) Stichting Bedrijfspensioenfonds voor de Metaalnijverheid recently surveyed its economic advisers worldwide for their views on monetary union. Only one thing emerged clearly: "I can say (there's) no consensus," said Roland van den Brink, manager-policy and information for the metalworkers' pension fund, based in Rijswijk, Netherlands.
Despite confidence expressed by European political leaders at their mid-December summit meeting in Madrid, many investors question whether EMU will occur on schedule - or at all. They also don't agree on whether a small number of countries might participate in the first round or whether EMU will occur only if a broad band of countries is involved.
"I think there is a significant chance it will happen," said Graham Bishop, adviser on European financial affairs to Salomon Brothers, London, who predicts an 80% likelihood that EMU will occur.
Alison Cottrell, senior international economist at PaineWebber International (U.K.) Ltd., London, said the chances of EMU occurring by 1999 under the Maastricht Treaty's tight fiscal regime are "extraordinarily small." She questions whether even two countries will qualify under the current rules. "A lot more political will" is needed to create a broad monetary union, she said.
Some are hedging their bets. Edward C. Dove, director-fixed income at Julius Baer Investment Management Inc., London, thinks there's a 30% chance EMU will occur in 1999, a 30% chance it will get delayed until 2002, and "a 40% chance (EMU) will wither on the vine."
The upshot, some money managers say, is to sit tight until the picture becomes clearer.
However the EMU is decided has huge ramifications for investments in European stocks and bonds. A collapse of EMU might cause bond yields on French and Belgian bonds to leap skyward. Some currencies risk devaluation. And some fear the European Union could cave in altogether.
Success of EMU also has far-reaching implications. Monetary union would be good news for European bond prices and currencies as EU nations continue to ride herd on government deficits. Exchange-rate volatility should narrow. Stocks might be valued on a pan-European industry basis rather than a country basis.
Few analysts concur on the future course of a single currency in Europe - now officially dubbed the "Euro" - but most agree France must participate in EMU for it to happen.
The underlying basis for the European Union was to prevent future wars, particularly between Germany and France. German leaders have made it abundantly clear EMU cannot advance without France.
But France's ability to reduce its budget deficit to the Maastricht Treaty's ceiling of 3% of its gross domestic product by 1997 is in grave doubt; the French deficit is running at 5% of GDP.
While the French government has forecast economic growth of 2.8% next year, most economists now project growth at 2% or lower, which could keep the deficit around 4% of GDP. That's not taking into account France's recent public-sector strike, which has worsened matters.
But Salomon's Mr. Bishop doubts whether France would be excluded from EMU if the country narrowly misses the 3% target, because both the slowdown and the strikes were generated in part by the French government's efforts to meet the Maastricht criteria for economic convergence.
He admits if France weighs in with a deficit about 4% of GDP, "that begins to get more difficult." But then Germany's ability to satisfy the Maastricht ceiling of 60% of public debt to GDP now is jeopardized by a Europeanwide economic slowdown.
If EMU moves ahead, Mr. Bishop believes there's a good chance Belgium, Austria, the Netherlands and possibly Spain and Portugal would join France and Germany in monetary union.
Gordon Johns, managing director of Kemper Investment Management Co. Ltd., London, said "there's a reasonable chance EMU will happen with a very small number of participants, possibly as few as two - Germany and the Netherlands.
If Germany decides that it's not in its political interest to have EMU without France, then other southern European countries will argue for a delay, he said.
But PaineWebber's Ms. Cottrell believes EMU will occur on a broad basis or not at all.
The EMU cannot move ahead with major European governments able to devalue at will, she added. German consumers crossing the Alps to buy their cars in Italy have exposed that vulnerability, she said.
A delay in EMU is virtually inevitable, Ms. Cottrell argued.
Adrian James, director of research for Rogge Global Partners PLC, London, said postponement of EMU may be necessary, especially as slower economic growth rates are making economic convergence more difficult to achieve.
"My worry, from a political perspective, is you could have a large monetary union with a restrictive set of policies that would turn out to be unmanageable," Mr. James said.
If fiscal and monetary targets are not realistic, "the whole thing could blow up," he said. Without the ability to print money, countries would be forced to raise taxes or cut expenditures - or bail out of EMU altogether, he said.
It will be much easier for countries to withdraw from EMU before a switch to common paper bills and coinage occurs in 2002, he observed.
Some analysts think EMU won't happen at all. James Lister-Cheese, a strategist with London-based Independent Strategy, believes France will fall far short of its 1997 deficit target of 3% of GDP. Poor economic conditions and erroneous government assumptions will cause the deficit to hit 4.4% instead, he said.
Delaying EMU for a year or two would mean France still would need a big growth boost - obtainable only by devaluing the franc, he said. But that would involve abandonment of the "franc fort" - the backbone of the Franco-German axis, Mr. Lister-Cheese added.
A further delay would impair German Chancellor Helmut Kohl's ability to control EMU, especially in the face of tough demands by the German opposition party to ensure the soundness of the Euro, he explained.
What's more, Mr. Lister-Cheese expects the Bundesbank to increase interest rates in the second half of 1996, placing further tension between the two nations.
That means French 10-year bonds could shoot past their historic level of 150 basis points over bunds from about 60 basis points now, making EMU all the more unlikely he said.
If EMU is abandoned, national debt securities should be valued on their fundamentals; this is bad news for Belgian, French and southern European bonds, except for Spanish 10-year bonds, he said.
The problem with EMU, Mr. Lister-Cheese added, is the authors of the Maastricht Treaty forgot about one key economic criterion: growth. Given the roller-coaster nature of European economies, "I don't see how (EMU) will happen in a converged fashion," he said.