EU ministers support new exchange rate mechanism

EUROPEAN Union Finance Ministers have taken another decisive step towards the establishment of a single currency with the decision to create a new exchange rate mechanism to govern the relationship between those in and out of the euro.

Meeting on Saturday in Verona in an informal session, the ministers also agreed to press ahead with studies into the problems involved in further tightening multilateral supervision of countries convergence programmes - seen as a key to monetary stability - and in creating new sanctions for those who are insufficiently disciplined.

The President of the Commission, Mr Jacques Santer, expressed confidence that all member states could now be ready for the single currency by 2002, when the new notes are due to be issued. And he pressed those not likely to meet the 1999 start to go ahead with the necessary technical preparations.

The Minister for Finance Mr Quinn, who said he was delighted with the progress made, now faces the challenge as incoming president of Ecofin of steering the process of putting flesh on the new mechanisms ahead of the Dublin summit in December.

But today he will bring back little comfort to Dublin on Ireland's central preoccupation in the run up to the launch of the euro - finding means of limiting Britain's freedom to devalue.

The British Chancellor, Mr Kenneth Clarke; insisted that Britain would not join an exchange rate mechanism (ERM) and made clear his opposition to any further mechanisms for multilateral surveillance of members economies. He ruled out penalties on states that devalue.

"It is not in anyone's interest to devalue," he asserted.

He told fellow ministers that such was the unpopularity of the ERM in Britain "Britain is likely to be in the euro before it ever joins an ERM."

And the Governor of the Bank of England, Mr Eddie George, scotched talk emanating from several senior EU leaders that membership of an ERM was a treaty precondition for membership of the single currency. If Britain decided to join the euro, he said, "it would be completely dotty to exclude a country from the euro that has a stable currency but has not been in the ERM".

Mr Quinn acknowledged that unless Britain's position changes, inside the euro Ireland's protection from the danger of a British devaluation rests almost entirely on the political resolve of this and future British governments to maintain a hard currency which shadows the euro.

He regretted the fact that the meeting had not addressed what he said was the reality that sterling's standing in the markets is not simply a function of the health of the British economy, but also of that of the dollar.

Despite British and Swedish insistence that they will not enter a new ERM, ministers backed proposals from the European Monetary Institute (EMI), the precursor to the European Central Bank (ECB), on an outline shape of the new mechanism anchored around the euro. They give a significant role to the ECB in operating a more streamlined early warning system than the current ERM allows for.

They also suggest the possibility of multiple fluctuation bands within the one system and ensure that the ECB will have a say in fixing the entry point of members and in initiating discussions on realignment.

The ministers agreed that the Commission should study means of tightening the controls on the convergence programmes of the "outs" and the new stability programmes of the "ins".

The Commission will also examine the feasibility of French proposals to pay EU grants to member states who devalue in their own currencies so that they do not benefit, as at present, from windfall gains arising from the rise in the value of the ecu. The possibility of clawbacks on structural, regional, and cohesion funds will also be explored.

There are some concerns among ministers about the Commission's own proposals to put in place what it calls "autocorrection" mechanisms under which the member states would prenotify the Council of Ministers about action that they intend toe take if their convergence or stability programmes start going awry.

The ministers also discussed German proposals for a Stability Pact for the euro members - the idea was an agreement to tighten budget deficit targets to 1 per cent of GNP with automatic fines being activated for those who broke the targets.

The president of the Bundesbank, Dr Hans Tietmeyer, acknowledged, however, that his preferred 1 per cent deficit ceiling would be illegal unless the treaty was changed - a suggestion which is anathema. He believes that the 15 should now instead, reach agreement on as tight as possible interpretation of the current treaty.

The ministers agreed to a formula that recognises the 3 per cent ceiling, but reflects an aspiration to move towards balanced budgets.