Major to Propose `Hard Ecu' to Bypass Weakened ERM
LONDON — BRITAIN is planning an initiative aimed at giving the European Community a way to move forward from the virtual breakdown of its Exchange Rate Mechanism (ERM).
Senior government sources say Prime Minister John Major will propose to his Cabinet next month that instead of creating a single currency replacing all others, European Community governments should launch a pan-European currency to run parallel with existing monetary systems. If Mr. Major gets Cabinet approval for his idea, Britain will make a formal proposal to a special one-day meeting of EC leaders scheduled for October.
Major has coined a name for the new currency. He is calling it the "hard" Ecu, or fixed rate European Currency Unit. His officials say the hard Ecu could be used by traders while existing currencies remained, and could lead to a single European money system. If it proved unpopular, that would indicate that there was no demand for a single currency, an adviser to Major said. Early proposals met with little enthusiasm
Major first floated the idea of the hard Ecu two years ago. The idea was rejected by other EC governments which at that time were enthusiastic about the ERM. Britain's partners were strongly advocating the Maastricht Treaty and saw the ERM not only as a means of keeping EC currencies in close relationship, but also as a stepping stone to full monetary union.
Yet the Aug. 1 decision to order drastic reforms to the ERM by widening the bands within which individual currencies may fluctuate is widely seen as having made a single European money system unlikely in the near future. Major and his ministers hope to fill the gap by launching a campaign on behalf of the hard Ecu.
The EC already has a monetary unit called the Ecu, but its value is determined by averaging out the value of a "basket" of Community currencies. This means it can lose value against some of them. It has failed to win popularity as a trading unit.
Under the Major scheme, a British official explained, the hard Ecu's value would be guaranteed to keep pace with the strongest European currency. Importers and exporters could trade in it, confident that its value would not change.
This advantage has been underlined by Britain's Institute of Directors, whose spokesman said the hard Ecu would "eliminate the risk of companies losing out because currency values change after contracts are signed." Strife among Conservatives
By returning to his hard Ecu proposal, Major is generating fresh controversy within the ruling Conservative Party. Sir Edward Heath, the former prime minister, who took Britain into the EC 20 years ago, said on Aug. 8 that he still wanted a single currency and insisted that most businessmen agreed with him.
"We must have a currency that is strong enough to stand up to the speculators. The only way you can do that is by having one strong currency," Sir Edward said.
But Norman Lamont, the former Chancellor of the Exchequer, said the hard Ecu was "a voluntary approach to monetary union." Major deserved "great credit" for proposing it, he said.
Euro-sceptics in the Conservative Party who fought bitterly against ratification of Maastricht have shown no enthusiasm for the hard Ecu proposal. John Townend, chairman of the party's parliamentary finance committee, said those who were opposed to a single currency "should not do anything to help it on its way." He calls for "a period of masterly inactivity."
A possible ally for Major in his championship of the hard Ecu is Edouard Balladur, the French prime minister who was also the PM in 1991 when Major first proposed the hard Ecu. At the time, Paris officials said Mr. Balladur was impressed with the idea.
Major may also see pushing the hard Ecu as a way of sidetracking possible moves by Germany, the Netherlands, and other countries to speed up progress toward monetary union among a small group of EC members.