THE admission by the new French government that it will not meet the 3 per cent deficit criteria set down in the Maastricht Treaty is finally bringing some of the crunch issues surrounding monetary union out into the open.

For the first time one member of the key Franco German axis has conceded that its deficit will exceed the target level and, in all probability, the German deficit will also be more than 3 per cent. Both governments still insist that the euro must go on ahead on time, but the basis on which members will be admitted to the single currency club is now unclear.

Over the past couple of years, senior German politicians have sought to reassure their electorate by insisting that the Maastricht rules would be strictly applied. The Bavarian premier, Mr Edmund Stoiber, was at it again yesterday. Their political problem is that many German people are nervous that a loose interpretation of the Maastricht criteria will mean that the new euro will not be as strong as the deutschmark.

It has been obvious for some time that France and Germany were both struggling to meet the key budget deficit target. But the French admission brings the conundrum out into the open. How will the membership of the single currency club be regulated if France - and maybe Germany itself - fails to qualify under a strict interpretation of the rules?

The timing of the speech by senior Bundesbank council member, Mr Reimut Jochimsen, questioning the basis for monetary union, could therefore hardly have been more sensitive. He earns his membership of the council as he is president of a regional central bank and is thus not as influential a figure as the senior executive led by Dr Hans Tietmeyer. Here the new Government will nervously watch developments. The pound rose against the deutschmark yesterday in tandem with sterling, gaining almost a pfennig to DM2.6211.

Buying of the pound is still being driven by a belief internationally that - the pound's central rate in the ERM may be revalued in the run up to EMU - a move which seems unlikely for the moment. But the new administration could yet find itself facing turbulence in the markets as the tensions over the euro project build in the second half of the year.