960414

EU nations move towards

new currency mechanism

VERONA: European Union nations, overriding British objections, appear determined to find a way of firmly linking countries that stay outside a future monetary union to a single European currency.

"There must be some kind of exchange rate system between those inside a monetary union and those outside it," Italian Prime Minister Lamberto Dini told a news conference after an informal gathering of EU finance ministers and central bankers.

Britain, strongly opposed to formal exchange rate links after sterling's undignified exit from the European exchange rate mechanism (ERM) in 1992, said it wanted no part in any future arrangement that even remotely resembled the ERM.

But a majority of countries in the 15-nation bloc say a new exchange rate grid is needed to keep some degree of stability on international foreign exchange markets and to ensure the proper functioning of Europe's single market.

German Finance Minister Theo Waigel said Britain should strictly observe the 1992 Maastricht treaty, which requires that states should serve a two-year apprenticeship in the ERM before advancing to join a currency union.

But, despite Waigel's insistence on following the treaty to the letter, Dini appeared to signal that Britain would not necessarily be barred from joining a currency union in future simply because it stayed out of a revamped ERM.

The treaty says currencies in the ERM should fluctuate within a 2.25 percent band but the margin for most countries has been widened to 15 percent since the 1992 currency debacle

"It's true that since the treaty was written there has been a change in the bands. Countries outside the band can be stable ...This will be part of the decision at the beginning of 1998," Dini said.

British Chancellor of the Exchequer (finance minister) Kenneth Clarke made clear that Britain had by no means ruled out joining a currency union and he saw no reason why it should be excluded if it pursued sound monetary policies.

"It would be quite absurd to exclude a country which satisfied convergence criteria and exchange rate stability on the basis that it hadn't had a formal two years membership of an ERM," Clarke told reporters.

Many of the technical details of a revamped ERM have still to be sorted out. The European Monetary Institute and the EU's monetary committee are to present a more detailed report on the plan to a summit of EU leaders in Florence, Italy, in June.

The Verona meeting, sensitive to the ERM's turbulent history, put great emphasis on building a more flexible system which would give a watchdog role to a future European central bank.

It also supported Germany's plan for a so-called stability pact for members of a currency union to ensure that they did not stray from a path of strict fiscal rectitude.

The ERM went through a severe crisis in 1992 which forced both Britain and Italy out of the currency grid and led to costly intervention by central banks throughout the EU.

Under the new proposal the president of a European central bank would play a policing role by initiating changes in the parity rates of currencies which came under speculative attack.

Underscoring the degree of commitment towards a revamped ERM, French Finance Minister Jean Arthuis told reporters: "The exchange rate mechanism will exist with or without sterling."-Reuter