Fears of bitter row over EU single currency begin to fade

 

FEARS that this weekend's Verona meeting of EU finance ministers would result in a bitter row between Britain and its partners over the single currency have begun to fade. French proposals to force non participants in the euro into a new form of the Exchange Rate Mechanism are now generally seen as a non runner, and the beginnings of a consensus about how to structure the crucial relationship between the "ins" and "outs" appears to be emerging.

The meeting, which will be largely devoted to the issue, is now likely to produce agreement in principle to work on mechanisms to ensure monetary stability between the "ins" and "outs" and to indicate broadly that such mechanisms will probably be based on agreement to work to jointly approved financial and monetary disciplines. A voluntary ERM type system may also have a role to play.

At a press conference yesterday, the Commissioner for Economic Affairs, Mr Yves Thibault de Silguy, acknowledged that a new monetary system would have to be put in place with the creation of the euro.

He made clear, however, that any such mechanism would have to be based on an "elaboration" of the current treaty rather than treaty changes, hence effectively ruling out the possibility of a compulsory ERM. But Irish sources were keen to stress that, even without an ERM, member states were determined to ensure that whatever does emerge makes "operational" any commitments made to financial discipline.

The emergence of a possible consensus will be a reassurance to Ireland, whose primary concern now on the euro is the relationship with sterling.

Fears that a new mechanism might too easily allow the "outs" to devalue against the euro, threatening jobs in neighbouring markets, have led to insistence on structures binding the "outs" to a close relationship to the euro.

But French proposals for a mark-2 Exchange Rate Mechanism for the "outs" will simply not run politically in Britain Sweden or Finland.

In Britain, the Chancellor of the Exchequer, Mr Kenneth Clarke, argues that an inflexible system, pegging rates between tight bands, does not address the causes of monetary instability. These can be addressed, however, by agreeing to tight monetary and inflation disciplines.

Mr de Silguy yesterday acknowledged that such agreement would be "necessary but not sufficient" to maintaining monetary stability. Markets had shown that they were capable of being pushed out of kilter despite sound monetary fundamentals. There would need to be some form of "solidarity mechanisms", he said, hinting at an intervention role for central banks.

It is understood that the British would find joint monitoring more politically acceptable than membership of an ERM, as they could argue that such a practice is simply good housekeeping and conforms with the current treaty obligation to regard a country's currency as a matter of "common interest".

Mr Clarke would then be able to tailor his monetary policy to shadow the euro closely, leaving Britain the option at any staged of joining the single currency without having to go through the trauma of membership of a new ERM. From an Irish perspective, British monetary discipline would be assured.

The Verona meeting is also due to discuss the proposals from the German Finance Minister, Mr Theo Waigel, for a stability pact among those involved in the euro, with sanctions of severe fines for countries which stray from agreed budgetary targets.

Mr de Silguy said that the Commission endorsed the idea of turning "a programme of convergence into a programme of stability". It was essential, he said, to ensure that there was continuing "budgetary rigour" once the euro was launched, but that any arrangements for a co ordinated approach had to respect the treaty and not see the creation of a "Schengen type budget area".

The key question, Mr de Silguy said, was to reach an agreement on the necessity for a continuing programme of balanced budgets. The detail would follow.

Mr de Silguy's coyness reflects the view of more than one Finance Minister that Mr Waigel's general scheme is correct, although the targets and application of automatic penalties may be too severe.