Britain Seeks To Restructure Currency System
More-flexible, supportive format sought. EUROPEAN UNITY
EUROPEAN governments are confronting the challenge of convincing 300 million people in 12 countries that the goals of political and economic cooperation enshrined in Europe's first agreement on integration, the Treaty of Rome, remain credible and attainable.Skip to next paragraph
Subscribe Today to the Monitor
In the run-up to an emergency summit meeting of European Community leaders in London on Oct. 16, the most urgent task the governments face, political and economic analysts say, is to agree on a way to reshape currency arrangements after the debacle that forced Britain to quit the European Monetary System (EMS) and devalue the pound on "Black Wednesday," Sept. 16.
The 12 governments, struggling to gauge the extent of additional problems created by France's wafer-thin "yes" vote on the Maastricht unity treaty, also have to find ways of restoring public confidence in the concept of a united Europe.
As British Prime Minister John Major, current chairman of the European Council, prepared for the emergency summit, he became locked in public argument with Germany's Bundesbank about the terms of Britain's eventual reentry into the EMS. He also received sharply conflicting advice about the direction the EC should take in regard both to Maastricht and to European exchange rates.
Lord Jenkins, a former British chancellor of the exchequer and a past president of the European Commission, says the way to avoid currency turmoil is for Europe to equip itself with a single currency.
But former Conservative Party chairman Lord Tebbit insisted that the EMS was "like Monty Python's dead parrot." It cannot be nailed back onto its perch, he says.
The extent of the dilemma facing EC governments on future currency arrangements became clear when Helmut Schlessinger, president of the Bundesbank, said Sept. 21 that there was "no need to change the EMS" and that Britain, if it wished to reenter the system, must do so "by agreement with its EC partners." Reentry was not automatic, he said.
Mr. Major remains convinced that fundamental reform of the EMS is essential. If Britain is to reenter a fixed parity system, government officials say, it must be a more-flexible and less-fragile arrangement than the one that unleashed chaos on European currency markets.
Most British Cabinet members appear convinced that an eventual return to the EMS is necessary, but Conservative Party sources say three senior ministers disagree. The dissenting ministers preferred to stay out of the EMS and "go for growth" on a national footing, the sources say.
Under the Exchange Rate Mechanism (ERM) of the EMS, EC countries agree to fix their currencies in relation to the German mark. The value of currencies is allowed to vary within agreed limits. When a currency comes under pressure, other EC members are supposed to give it support. System breakdown
When the system broke down in anticipation of the French referendum on the Maastricht Treaty, British, Italian, and Spanish currencies had to be devalued. Britain has since accused Germany's Bundesbank of failing to prevent a run on the pound by sticking to its policy of maintaining high interest rates.
Major and Chancellor of the Exchequer Norman Lamont have indicated that if Britain is to reenter the EMS, its EC partners must promise to give more support to a currency in trouble.
A further sign of tension between Britain and Germany appeared on Sept. 22 when the Bank of England lowered its interest rate from 10 percent to 9 percent within hours of Mr. Schlessinger warning the British government to avoid policies that might increase inflation.
After the interest-rate drop, Lamont said Britain's counter-inflationary policy remained in place, and conceded rates might have to be raised again if inflation rose. Other currencies threatened
Leading financial analysts also questioned the German insistence that modification of the EMS is unnecessary. Paul Chertkow, global-currency strategist at UBS Phillips and Drew in London, says the removal of the pound and the Italian lira from the EMS put pressure on the parities of other currencies, including the French franc. The relatively weak Irish punt appeared particularly vulnerable to future speculation, he says.
British officials say appraisals like these have convinced Major that at next month's London summit EC governments must accept EMS reform as a top priority. The Maastricht Treaty, with its commitment to economic convergence of EC member-states, made no sense without monetary integration, they reasoned.
Writing in the London Evening Standard, Major said Britain would not return to the ERM "until it has been reformed."
British parliamentary approval of Maastricht is impossible while the pound continues to float outside the EMS, a Downing Street source says, adding that the London summit would also have to "find ways of restoring the faith of the people of Europe in the EC."
Downing Street sources say Sarah Hogg, Major's personal economic adviser, also favors a looser ERM with safeguards against violent stampedes by exchange dealers from one currency into another. Major was thought ready to put forward such a proposal at the London summit.