The Dutch Finance Minister, Mr Gerrit Zalm, a monetary union hard-liner, last night denied a report he would quit the government if Italy was allowed to join the first wave of European economic and monetary union.

The Dutch newspaper NRC Handelsblad, quoting senior political and diplomatic sources, reported in its evening edition that Mr Zalm would resign if the Netherlands backed Italian membership of EMU.

"We insist on strict application of the criteria and we will not throw away our good guilder. . . but will only exchange it for a sound euro," he told Dutch television news, adding that Italy would have more difficulty meeting the single currency goals than Luxembourg.

A Finance Ministry spokesman added that the Dutch minister denied ever having said that he would resign if Italy was allowed to join.

However, he stopped short of saying Mr Zalm fully backed Italy's bid for early membership of EMU.

Handelsblad said Mr Zalm, a member of the free-market VVD liberals, was at odds with the Labour Prime Minister, Mr Wim Kok, who believed Rome had made sufficient economic and budgetary progress to guarantee an EMU ticket.

Observers say it would be very difficult for the Dutch to attempt to keep the Italians out of monetary union. The Italian budget deficit is already in better shape than the German. The only real way would be to point to sustainable convergence but this close to monetary union such a move is seen as very unlikely.

However, if the Italians were to be removed from the picture it would mean lower interest rates for all the other countries - including Ireland.

It would also leave Ireland as the only outsider on interest rates and could mean earlier than expected cuts in interest rates here.

Even without this, one of Germany's premier forecasting agencies said yesterday that the result of the Asian crisis could actually be an interest rate cut from the Bundesbank rather than the rise it was expecting only one month ago.