UK ‘stifling’ ERM debate

Date: 15/02/1996

By Tim Jones

THE UK government is suspected of trying to sabotage the creation of a new-look Exchange Rate Mechanism (ERM) designed to ensure currency stability between the 'ins and outs' of a Euro bloc.

Officials fear that the already slow progress being made in defining the future relationship between member states qualifying for single currency and those which do not could be hindered further, making a meaningful report to the Florence summit in June impossible.

They suspect that by trying to kill the idea with scores of potential drawbacks, UK Prime Minister John Major hopes to avoid a political backlash against any attempt to force sterling back into the kind of currency grid from which it was ejected just over three years ago.

“It appears the Brits are trying to avoid having any system in Stage Three and they would like to ruin the discussion,” complained a senior European monetary official.

The British offensive began at the Madrid summit in December when Major called for an analysis of the effects of having an élite Euro group surrounded by countries either keen but unable to join or, like the UK and Denmark, choosing to stay outside.

On 17 January, UK Chancellor of the Exchequer Kenneth Clarke sent a letter to fellow finance ministers in an attempt to draw their attention to a series of potential problems. “We must plan for difficulties that may arise so that Europe's achievements are not undermined,” said the letter.

But it was when Clarke's officials came to the 7 February meeting of the EU's monetary committee armed with stacks of follow-up documents that other representatives cracked.

“These questions are all very well,” said one monetary committee official, “but they are coming forward with issues that have nothing to do with the committee, such as effects on agricultural payments, the budget and structural funds.”

Papers forwarded to the committee call for efforts to ensure that there is no temptation for members of the Euro bloc to seek extra funds from the Union budget to compensate for domestic regional disparities, or to help favoured outsiders qualify for entry.

Another seeks to ensure that the German government's plan for a 'stability pact' within the Euro bloc to ensure tight budgetary rules should not make it harder for outsiders to join, and yet another for clarity on how outsiders would be represented institutionally.

“There were an awful lot of questions from the British delegation,” complained an official. “It gives the appearance that they are trying to hold up the whole discussion.”

One German committee member suggested such objections would only be raised by someone trying to delay the whole process.

Naturally, the British deny any such intent, saying it would be strange if they had not followed up Clarke's letter with more detail.

Indeed, the British cannot be accused of hiding their intent, since the letter made it clear that they want to stay clear of any attempt to recreate an exchange rate system out of the ashes of the August 1993 ERM collapse.

“Experience has shown that such systems cannot cope with times of major market stress and turbulence,” it stated.

While the Madrid summit called on finance ministers - with the help of the European Commission and the European Monetary Institute - to come up with recommendations on the future relationship between the 'ins and outs', it did not specify that a new ERM was needed. London is keener on a series of inflation targets.

But every other member state is working on the understanding that an ERM II will be concocted, whether the UK wants it or not.