THE man most likely to be president of the new European Central Bank has backed Ireland's case for membership of the first group moving to monetary union.
Mr Wim Duisenberg, the head of the Dutch central bank, has named Ireland as likely to be in the first wave of states moving to the single currency in 1999.
Meanwhile, it has emerged that a special deal is likely to be offered to Italy, which would exclude it from the first group moving to monetary union, but will hold out the prospect of membership a year or two later.
This will sharply intensify the debate on which states will be among the founder members of monetary union.
Government ministers here have continually insisted that Ireland will be among the first group moving to monetary union. They will welcome yesterday's comments from Mr Duisenberg, who takes over as president of the European Monetary Institute - the forerunner to the European Central Bank - in the summer and is the leading candidate to become ECB president.
He said Germany, the Benelux countries, France, Finland, Austria and Ireland were likely to be in the first wave of monetary union.
His prediction comes after comments from German officials and business leaders that the first group to join monetary union would have to be small.
The Financial Times reports today that to assuage German clears talks are under way among EU central bankers and monetary officials on a plan which would allow Italy to opt out of the first group moving to monetary union in 1999, but probably allow it to join in 2000 or 2001.
The plan would meet German fears that if Italy is among the first EMU membrs the launch of a strong and stable euro on January 1st, 1999, could be compromised and financial markets unsettled.
Another concern is that the future European Central Bank would have to operate an expansionary monetary policy to accommodate the lira. That would increase the risk of higher-than-necessary interest rates in the euro zone, according to officials.
The plan is also aimed at easing worries that Italy's exclusion from the first wave could provoke a popular domestic backlash. This could jeopardise the structural economic reforms necessary for it to meet the criteria for the single currency.
Central bank and national treasury officials have begun work on a package to assuage German fears while offering Italy the necessary certainty that it could join EMU within 12-18 months of the launch of the single currency, and before the introduction of euro notes and coins on January 1st, 2002.
This is in spite of strong political opposition in Germany and the fact that Italy faces an uphill task to meet the Maastricht budget deficit targets.
This week, Mr Ulrich Cartillieri, a Deutsche Bank board member and keen supporter of EMU, warned that Italy could not sustain a hard currency.
The package seeks to define principles under which "second wave" countries could expect to join EMU:
(1) Equal treatment. EU leaders are due to select EMU members formally in spring 1998. First-wave leaders would pledge to interpret the Maastricht criteria in the same strict fashion but without extra barriers to membership.
(2) A new "transition mechanism" for countries left outside EMU. These would get a de-facto guarantee that they would be members provided they hit the Maastricht targets. They could adopt narrower fluctuation bands for their currencies against the euro, and expect support from the European Central Bank (ECB).
(3) Inclusive arrangements. One idea is to reserve one or two posts on the six-strong executive board of the ECB for second-wave countries. Another option is to recruit staff for the ECB from all 15 countries and allow Italy to print its own euro notes and coins ahead of 2002.
News of the talks on Italy's participation will raise speculation in the markets about who else may be offered similar arrangements and attention is likely to focus on Spain and Portugal.
Uncertainty about EMU led to sterling gains on the markets yesterday, with the pound falling to 98.58p sterling.
