ERM Crisis: EMS is dead without a successor: Collapse of monetary system triggers far-reaching rethink of what the EC is trying to achieve

Click to follow
The Independent Online
THE European Monetary System is dead in all but name, politicians across Europe said yesterday. And it remains far from clear what, if anything, will replace it.

It was not just the exchange rate mechanism that was in dispute in the wrenching discussions in Brussels on Sunday night. There were indications that the crisis in the EMS might have triggered a far-reaching reconsideration of what the EC is trying to do, and how.

Wim Kok, the Dutch finance minister, started to say what a number of officials and politicians had been thinking - the EC has messed it up. 'This is a face-saving action in order to prevent the system from collapsing,' he said. 'A further process of rethinking is neccessary.'

He added that politicians had not foreseen the effect of financial instability, exacerbated by political uncertainty, which had combined so damagingly with economic recession. The Maastricht treaty failed to take this into account.

'I always had some doubts about 1997 and they have not been diminished by today,' Mr Kok said. 'It wasn't an easy birth and it isn't a pretty child.' The likelihood of reaching a single currency in 1997 as foreseen by the Maastricht treaty was slim, he said, though the second chance - in 1999 - was still possible.

The EMS's founders, Valerie Giscard D'Estaing and Helmut Schmidt, warned that the decision was 'clearly in contradiction with the pursuit of European Monetary Union.'

The dismantling of the exchange rate mechanism brought sharp protests from elsewhere. Angry exchanges between France and Germany dominated Saturday's meeting of officials, and the sparring continued yesterday. Other states also attacked the deal.

'Denmark is not a supporter of the new system,' said Erik Hoffmeyer, governor of the Danish central bank, yesterday. Spain had argued for suspending the whole system. Britain took a back seat, refusing even to brief reporters during the meeting, for fear of seeming to gloat.

This outbreak of harsh words could be the most useful thing to come out of a period of crisis. But the result is still unclear. No new consensus has formed among politicians or opinion makers, and the settlement on Monday morning was merely a stop-gap.

The UK Government now believes it can plant a set of ideas to reshape the Community's direction. Its contribution to Jacques Delors' proposals on economic renewal, released yesterday, is one example; another was John Major's statement yesterday about the bankruptcy of monetary union.

However, Henning Christophersen, the EC's monetary commissioner, was still insistent that things would go on as before. 'The system has been more fragile than we thought it would be,' he said. 'That is why we need a stronger system. I don't mean the ERM. I mean Economic and Monetary Union.'

The Commission will hold an emergency meeting on Friday to consider the consequences. These include new farm spending, a probable revision of the budget and a rethink on some subsidies.

But once it regroups in September, the EC will launch into policy areas where conflict is inevitable. Firstly, it is about to begin a debate on unemployment, the ground for which has been cleared by removing the cause of high interest rates. But angry exchanges can be expected over cutting levels of social protection, remodelling labour markets and raising spending on infrastructure.

Secondly, trade will loom large. The Gatt round is to be completed by the end of the year, and this may require further concessions from the EC. France is still threatening to break out of the agreement reached in Washington last year on farm trade, and could be far more belligerent now, British officials fear.

German exporters face problems, including the east German steel industry, officials said, and the result will be arguments over state aid.

Thirdly, discussions of monetary questions will continue, in the context of the second stage of Economic and Monetary Union.