LONDON — A SEVERELY chastened European Community yesterday was struggling to emerge from financial ferment on international currency markets.
Wednesday's lightning crisis forced Britain to devalue the pound and withdraw temporarily from the European Exchange Rate Mechanism (ERM). Also it has dented the credibility of the 12-nation grouping's monetary and economic policies.
What Gavyn Davies, chief economist of Goldman, Sachs & Co. in London, called "a momentary fit of madness" in which for several hours "markets ruled governments," gave EC leaders no option but to launch a realignment of their currencies. It dealt a damaging blow also to the reputation of British Prime Minister John Major, raising questions over the future of his government.
In Brussels, where officials worked through the night Wednesday to reshape the ERM, senior officials worried that even a "yes" vote in Sunday's French referendum might not prevent the derailment of Europe's drive toward political and economic union.
In Britain, where backbench supporters of the Major government called on Norman Lamont, chancellor of the exchequer, to resign, Parliament is being recalled for a crisis session next Thursday. Downing Street officials yesterday launched a bitter attack on Germany's Bundesbank, accusing it of precipitating the crisis by deliberately undermining confidence in the pound.
Yesterday the Bundesbank said it would make no change in its interest rate. Britain's decision to pull out of the ERM had put no pressure on Germany to react, a Bundesbank official said.
Sir Alan Walters, a leading monetarist who was economic adviser to Margaret Thatcher, the former prime minister, said the Maastricht Treaty was effectively dead and the EC's monetary system "hopelessly discredited." "Many of us saw such a crisis coming - it was only a matter of time," he said.
Following an emergency three-hour Cabinet meeting on the subject yesterday, a senior British government official said the pound would resume its place in the ERM "as soon as conditions allow."
In Paris, most political analysts forecast that a "yes" vote in the referendum was now more likely. Several Paris banks warned that a "no" vote would put heavy pressure on the franc and force French interest rates to rise.
It was from Brussels, however, that some of the most somber analysis flowed yesterday. An official of the European Commission who works closely with Jacques Delors, its president, said: "We are picking up the pieces. After such an earthquake, the Community is bound to have altered horizons."
Another EC source said the goal of political, economic, and monetary union seemed "much further away," and suggested bickering between member governments was bound to continue. But EC officials also launched a strong defense of the ERM, saying the pressures were unprecedented and in no small part due to massive speculation on money markets.
THE EC governments' most immediate task is to work out a new series of relationships between currencies to reflect the collapse of the pound and the severe weakness of the Italian lira. It was the slide of those two currencies against the strong German mark that triggered the tumult in financial markets on what British traders are calling "Black Wednesday."
The last general realignment of EC currencies was in 1987. Negotiating new currency rates, Mr. Davies said, promised to be a "bruising experience for all concerned."
In Britain, which currently holds the rotating presidency of the EC, Mr. Major confronts a full-blown crisis. He has said repeatedly he would never sanction devaluation of the pound. Only days ago, Major declared Britain was secure with in the ERM.
But London financiers yesterday predicted an effective devaluation of sterling by up to 10 percent by the middle of next week.
Sir Norman Fowler, chairman of the Conservative Party, said there was "absolutely no question" of Major or Mr. Lamont resigning. The Labour opposition has launched a savage attack on the government's hour-to-hour handling of Wednesday's run on the pound. Within 20 hours Lamont raised interest rates to 12 percent, hoisted them to 15 percent, brought them back to 12 percent, then returned them to 10 percent.
Gordon Brown, Labour's shadow chancellor, said this showed the government did not know what it was doing. "Now that every cornerstone of John Major's economic policy is gone, he should make a statement on what policy he is to put in its place," he said.
In an editorial yesterday, The Times of London said, "Lamont has about the same survival chance as a First World War infantry officer on the Western Front."
The government can expect a difficult time when the Commons meets next Thursday. Some of its worst problems are likely to come from its own backbenchers. Before the crisis, 30 to 40 Conservative "Euroskeptics" were threatening to vote against ratification of the Maastricht Treaty. The government has a 21-vote margin in the Commons. Bill Cash, a Conservative MP opposed to the treaty, said the events of Black Wednesday would "immeasurably strengthen" the case against the treaty.
Supporters of Major said it was hard to see how the he could get treaty legislation through Parliament in the new circumstances, even if the French vote yes. As Major and his Cabinet wrestled with the problems created by the pound's collapse, it was announced in London that unemployment had risen to 2.8 million - the highest in five years.