Early euro-fix has few takers

Date: 29/05/1997

By Tim Jones

EUROPEAN governments are proving reluctant to adopt a Luxembourg plan to pre-fix currency rates before the short list of single currency members is drawn up in May next year.

Worried that the 18-month lead-in to monetary union in January 1999 could be derailed by currency speculation, Luxembourg Prime Minister Jean-Claude Juncker has come up with a 'war plan'.

Juncker, whose country takes over the EU presidency on 1 July, says governments which expect to enter the euro-zone in the first wave should announce the rates at which their currencies would join as early as this autumn; not the rate against the euro itself but against the other front runners and particularly against the deutschemark.

But so far, the plan has found few takers. Although the Union's powerful monetary committee has agreed not to debate the issue formally yet, many members already believe that an autumn announcement could be counter-productive.

“It is illogical to do anything until you know who will be in and that means waiting until May 1998,” said one official.

The European Commission is also sceptical. Officials are increasingly convinced that currency turbulence can be nipped in the bud by rising market faith in straightforward economic 'convergence'.

But the French and Belgian authorities are concerned to avoid a repeat of the 1992-93 Exchange Rate Mechanism crisis.

They believe the collapse of the pound, lira and peseta locked them into uncompetitive exchange rates and destroyed jobs in their export industries, and are keen to come up with a formula to avoid wild currency fluctuations in the run-up to economic and monetary union.

But this has raised a host of legal problems. The Maastricht Treaty specifies that the conversion rates of national currencies against the euro must be decided unanimously by EMU-participating finance ministers on the basis of a proposal from the Commission after consulting the European Central Bank.

By definition, this can only be done once the ECB is established in May next year and once the participating countries have been chosen.

All the key institutions are nevertheless considering a recipe of options in case a political decision needs to be taken to fix rates early.

The approach favoured by most officials, as well as the markets, is to use currencies' existing ERM central rates against the ecu, although this would leave open the problem of those currencies now outside the mechanism.

A less attractive option is an agreement at next May's special summit that conversion rates will be an average of the fluctuations against the ecu over the past two to three years.