Brussels insists Britain must rejoin the ERM

BRITAIN would have to rejoin the revamped exchange rate mechanism - which the pound crashed out of in September 1992 - if it wanted to abandon the pound and join the euro zone, the European Commission made clear yesterday.

But the Commission has left the door open to technical membership for a period shorter than the two years mentioned in the Maastricht Treaty, saying that exchange rate stability is the key. A revamped ERM is set to be launched next January.

In its definitive recommendation on economic convergence of the countries fit to join EMU in the 1999 first wave, the Commission ruled out Sweden - which has never been a member of the ERM and which has experienced major fluctuations against the ERM currencies.

But the Commission recommended that Italy and Finland, who only joined the ERM in November 1996 and October 1996 respectively, and therefore do not strictly fulfil the membership criterion, should be admitted.

Clearly the onus would still be on Britain to ensure sterling shadowed the euro after its launch and to find a way of demonstrating stability without being in the new currency grid. The Treasury repeated yesterday the insistence of Gordon Brown, the Chancellor, that Britain has "no intention" of rejoining the ERM.

That aside, the budgetary position of the UK and its performance on inflation would qualify Britain for membership.

The Commission's spring economic forecasts also show Government borrowing as a percentage of gross domestic product is expected to fall this year to 0.6 per cent, down from 1.9 per cent in 1997, due to the windfall tax on the profits of privatised utilities.

The Commission forecasts the deficit will fall again in 1999 to 0.3 per cent. It warns that because the bulk of the revenue from the windfall tax will not be spent until after 1998, the positive effect on the deficit will begin to unwind as revenues are spent.

Britain is one of only four members whose debt is below the 60 per cent of GDP target set by the treaty. The spring forecasts put the British debt to GDP ratio at 52.3 per cent this year falling to 50.9 per cent next year.

Outlook, page 25

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