Tietmeyer talks of "shadow" system for those outside EMU

A new currency system should be set up to prevent countries outside monetary union from devaluing to gain competitive advantage, according to Dr Hans Tietmeyer, president of the Bundesbank.

Speaking at a meeting of the Institute of European Affairs in Dublin yesterday, Dr Tietmeyer set down the Bundesbank's forthright views on monetary union, which highlighted several policy differences between the powerful German central bank and Irish Ministers and central bankers.

Calling for a European Monetary System II for currencies which do not join a monetary union, Dr Tietmeyer said an EMS II could be a condition of continued EU membership. In this way the currencies not in the system could track the euro and be prevented from devaluing rapidly to gain competitive advantage. "Whether this is a must for all EU countries or voluntary has yet to be decided," he told a press conference after the speech.

In a move which is bound to prove controversial, Dr Tietmeyer said the president of the European central bank could have the right to "initiate" devaluations in non member currencies. "The key point here is to find a satisfactory solution to political prestige," he said. It was this prestige which stopped currencies from devaluing early enough - or agreeing to a revaluation of the deutschmark - which would have prevented the 1992/93 currency crisis.

Pressing on, Dr Tietmeyer said the system for those not in the monetary union would permit relatively wide margins of fluctuation to discourage speculation. Floating rates could even be allowed, he added.

Dr Tietmeyer also called for all the criteria in the Maastricht Treaty to be met strictly. "The chances of securing lasting stability are inseparably linked to the choice of the participants based on the Maastricht Treaty criteria," he said.

"I agree with Mr Eddie George (governor at the Bank of England) that Maastricht means we must be strict," he joked.

Each member will have to be a bid to cope with the conditions of a stable single currency on an enduring basis".

He warned that competitive pressures would "undoubtedly" be greater in a monetary union. "If a country were unable to keep up with the demands of monetary stability, it would gradually lose its competitiveness," he said. "Growth and employment opportunities would be lost, and eventually that could lead to political tension."

He also warned that no country should place any hopes on financial transfers after joining a monetary union. That is ruled out by the Treaty's no bail out clause and would "certainly be a wrong signal". All countries must take responsibility for themselves, he insisted.

Responding to questions, he said that, even in the event of an asymmetric shock, countries must be responsible for "achieving the necessary flexibility through internal measures".

A government spokesman would not comment but pointed to Article 103A (2) where there is a reference that the Council acting in full agreement can grant community assistance to a member state in difficulty. Last week, the governor of the Irish Central Bank, Mr Maurice O'Connell said in the Dail that he saw "no problem in principle" to setting up such a fund.

Brushing aside Irish concerns that Britain may not join monetary union, Dr Tietmeyer told the press conference that many countries had difficulties with their trading partners and all countries had "special challenges".

Dr Tietmeyer also called on the members of monetary union to adopt a stability pact, such as the one proposed last year by the German Minister for Finance, Mr Theo Waigel.

Minister for Finance Mr Quinn, has said he had "serious reservations" about such a pact and has questioned the "severe" levels of the fines proposed for failure to comply with targets.