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EC leaders battling to contain currency chaos
BRUSSELS. Sept 18: EC leaders rallied on Thursday to defend the Exchange Rate Mechanism (ERM), battered by the withdrawal of the pound and the lira and threatened with more collusions by France's referendum on the Maastricht Treaty, reports Reuter
Just three days before France votes on the future of
European Community political and monetary union, top EC finance and central bank officials were forced to agree that Britain and Italy could cut their currencies free from the ERM's bonds.
The EC monetary commit tee. meeting through the night in an emergency session in Brussels, also sanctioned devaluation of the Spanish peseta by five per cent.
But by late on Thursday, markets had turned their fire on the Danish crown and the Irish punt, whose ERM parities were left unchanged In the realignment
Independent economists raised doubts about the very, survival of the ERM — a grid of exchange rales which until Thursday restricted the amount by which ail EC cur rencles except the drachma could move again* eac h other
But politicians were determined to protect the mecha nism — embryo of the single
currency envisaged by the Maastricht Treaty — and said Wednesday s chaos showed monetary union was needed more than ever.
"Let's not ask more of the European monetary system than it can provide," European Commission President Jacques Delors told French radio.
"It has already done a lot and it will do more, but only through common disciplines and a single currency will we be able to avoid events like those we have experienced
Belgian Finance Minister Philippe Maystadt took a similar line, saying a single currency was clearly needed to complement the EC's barrier free single market.
Thursday's shake-up In the ERM was the most radical In the 13-year-history of th* European Monetary System supposed to limit fluctuations in currency values.
The changes were a dra maUc symbol of the disarray
into which the EC has fallen this year slnc\Dunes voted in June against ratifying the Maastricht Treaty.
The popular backlash against the community has spread to France, where a strong "no" campaign has run neck and neck with the 'yes" camp, including most of the political establishment, ahead of Sunday's referendum.
The prospect of the French killing off monetary union — and the discipline that It imposes on the monetary and budgetary policies of EC governments — brought turmoil to currency markets already stretched by Germany s high Interest rates.
Central banks spent billions of dollar in a vain attempt to hold sterling within its ERM limits before the British government reversed policy and allowed it to devalue.
The strains on financial markets were reflected in tension between EC governments.
A British minister accused the German Bundesbank of undermining sterling instead of defending it. And a British attempt to have the entire workings of the ERM suspended was firmly slapped down by Bonn and its partners.
A victory for the "no" cam-Kffi USS'S the markets and reopen the wounds from last year s battles between EC members over Maastricht as they argue over what to salvage from the wreckage of union plans
Another report from London adds : Prime Minister John Major faced a crisis of confidence tn his economic policies on Friday and the pound once- again prepared to run the gauntlet of the foreign exchange markets.
Dealers were anxious to know when Britain would return to the European Exchange Rate Mechanism (ERM) which it quit on Wednesday in the worst sterling crisis for 16 years and whether there would be an interest rate cut to stimulate business
The government has made It clear that it will return to the ERM as soon as conditions allow but such a move is bound to revive deep splits in the ruling conservative party about participation in the mechanism.
Chancellor of the exchequer Norman Lamont saw central plans of his policies and his defence of the pound destroyed by the hitmen of the foreign exchange markets on Wednesday and the government is now struggling to restore its economic credibility.
Our policy is not in tatters. Our policy is to defeat inflation
and to get this country on a growth path again with tow in flatton, Lamont said tn one of a series of interviews on Thursday in which he explained why his policies failed.
One of his failed tactics — an Interest rate hike to 12 per cent — was revoked on Thursday to bring borrowing costs back to 10 per cent, a relief to businesses which had feared increased borrowing costs could turn recession 1qto slump.
Now they want another cul.
And on Friday there was further sharp criticism of Lamont from the opposition labour party which said the chancellor had squandered 500 million pounds (888 mil lion dollar) on unsuccessfully waging war with the foreign exchange dealers
The governments lailurc to manage the economy h.is not only cost the country by pro longing the recession and de straying the confidence of our European partners. It has squandered money. said Labour a treasury spokeswoman. Harrb i Harman.
In early London trading on Friday the pound was n whisker down on Thursday * close at about 2.62 marks.
which compares to its old central ERM rate of 2.95
The collapse of the pound was a serious blow to the cred ibtllty of both Lamont and Major who has based his policy on the twin pillars of keeping Britain at the heart of Europe and a single-minded ftghi against inflation to avoid a slump.
But there was little sign of an end to the two-year recession. the longest since the 1930s. in economic data re leased on Thursday showing manufacturing production lev els remaining flat and the jobless total still rising fast.
Lamont will attend the International monetary fund an nual meeting in Washing! on this weekend, but his long term position is still in doubt despite securing the support of the cabinet and explaining his handling of what he called a whirlwing.
He and Major, who was hailed as a saviour when he led the conservatives to a stunning win in the April general elec tton, could face more pressure at the conservative party annual conference 1n three
They must have a more credible economic policy firmly in place by then and the French referendum on the
Maastricht Treaty for political and monetary union at the weekend will be an important factor in what the government does next.
German Chancellor Helmut Kohl was quoted as saying Major told him Britain wanted an early ERM return. Major told me he is thinking of returning soon to the EMS. Kohl was quoted as saying by Italian Foreign Ministry undersecretary Valdo Splnl
But a row between Britain and Germany over sterling's effective devaluation and the reopening of old wounds in the Conservative Party could block any quick move to tie the pound back Into the European currency
British officials, who declined to be identified said Lamont clearly felt betrayed by the Bundesbank which Is now widely seen — including tn Major's government — as having waged a whispering campaign to provoke a sterling devaluation.
1 initially thought that we could possibly join again as early as next week, said Gavyn Davies, chief economist at investment bank Goldman Sachs in London. But the more you think about this, the more difficult it becomes.