‘Outs’ set to avoid forced ERM entry

Date: 28/03/1996

By Tim Jones

A FRENCH campaign to force non-members of a future monetary union into an exchange rate system looks doomed to failure without a renegotiation of the 'untouchable' economic chapters of the Maastricht Treaty.

This will come as a relief to the Swedish, British and Finnish authorities, which have fought within the EU's influential monetary committee to avoid compulsory membership of a currency grid - a position they will stick to at the informal meeting of finance ministers in Verona on 13 April.

The committee's president, Sir Nigel Wicks, all but ruled out the possibility of binding reluctant governments to an ERM II when he addressed the European Parliament's monetary policy oversight committee this week.

“Looking at the treaty, I find it difficult to think of circumstances where a member state could be forced to join the ERM,” he said. “I don't see any basis for that in the existing treaty.”

French Prime Minister Alain Juppé and his cabinet have been stung by the experience of the past three years, which has seen the Italian lira and the Spanish peseta lose more than 20&percent; of their value against the mark while the franc held fast.

As the relative price of French cars, textiles and steel rose, Juppé became increasingly worried about what the future might hold for a France locked into a monetary union with Germany but surrounded by non-members bent on devaluing into a highly competitive position.

To cope with this, the French have called for a mandatory exchange rate system with penalties for devaluing countries.

But Wicks plays down the whole idea that countries deliberately devalue their currencies, saying: “There is always a risk of putting up inflation or of the markets overshooting, so I think it unlikely that any country will deliberately go into a policy of unilateral devaluation.”

When the monetary committee met this week to prepare the Verona 'informal' meeting, the three governments stuck to their positions. Few now expect the last preparatory meeting on 9 April to find enough common ground to make detailed recommendations to ministers.

So far, member states have only been able to agree that a return to the narrow trading bands of the ERM before the implosion of the system in August 1993 is undesirable, and that member states should put their efforts into achieving 'convergence' of their economic performance.

They are still a year away from deciding operational features such as whether currencies should be tied only to the Euro or also to each other, or whether central banks should be legally bound to intervene in support of weak currencies.

It is possible that Verona will not even be able to conclude that an exchange rate mechanism is needed at all.

The UK government is unwavering in its position that the experience of the ERM shows semi-fixed currency systems cannot cope with times of major market turbulence. It claims that Article 109m of the treaty, which instructs each member state to “treat its exchange rate as a matter of common interest” does not specify that a new ERM is required. Instead, it wants to continue a policy of targeting inflation which would, it says, keep sterling's real exchange rate steady (once inflation is taken into account).

Needless to say, other EU member states disagree.

On this issue, Wicks is non-commital. “The treaty does seem to imply that some form of mechanism continues when the move to Stage Three has taken place,” he said, “but the treaty is not very helpful in telling us what the nature of that mechanism is going to be.”