All ERM currencies except the German mark and Dutch guilder can now move by up to 15 per cent either side of their central rates. Previously the Spanish peseta and Portuguese escudo had been able to move by 6 per cent and all other currencies by 2.25 per cent. The mark and guilder retain their 2.25 per cent fluctuation bands.
The bands will be reassessed before the beginning of next year, said Theo Waigel, the German finance minister.
It was also decided to review the covergence criteria in the Maastricht treaty on European union, one of which specifies that currencies have to have been trading in narrow ERM bands for two years before they can move to a single currency. Now the narrow bands have been abolished.
The decision was reached at around 1.45am Brussels time, following nearly 12 hours of tense talks between finance ministers and central bank governors of the 12 EC states. The meeting broke several times for bilateral discussions and to allow delegations to confer with their national capitals.
The Dutch finance minister said shortly after the meeting finished that Germany did not see a chance to cut its interest rates. Economists believe that the acid test of the agreement will be whether it allows France and other countries with weak currencies to cut their interest rates sufficiently to pull their economies out of recession and reduce record unemployment.
Some analysts feared that a widening of the bands would provide only temporary relief, with the French franc soon forced to its new floor of around Fr3.85 to the mark.
The beleaguered French franc dropped sharply in early trading in Tokyo, as dealers waited nervously for the decision. The franc slid to Fr3.4550 to the mark, down from Friday's European close at Fr3.4190. Its floor - which only has to be defended in European trading hours - was Fr3.4305.
The repeated line from ministers as they arrived for the talks in Brussels was that the ERM must be saved, preferably without any further devaluation of weak currencies.
The finance ministers began their discussions at 2pm Brussels time, adjourning in late afternoon so that the Belgian finance minister, Philippe Maystadt, could attend a cabinet meeting to discuss the succession to the Belgian throne, following the death of King Baudouin on Saturday night.
The adjournment gave time for two rounds of bilateral meetings between ministers. The 12 resumed round-table discussions in mid-evening, breaking up for a third round of bilaterals shortly before midnight. The plenary session resumed half an hour later.
'The EMS should and must remain. But there has to be more flexibility,' a spokesman quoted Theo Waigel as saying. The German finance minister is believed to have suggested widening the bands.
Mr Waigel hit out at critics who accused Germany of torpedoing the European Monetary System when the Bundesbank failed to lower interest rates last week as far as financial markets had expected. 'Nobody can blame us. We stood up for the EMS and our partners,' he said, adding that the Bundesbank had gone a long way in reducing interest rates to help European recovery.
Jacques Delors, the European Commission president, told French television that Germany should remove the mark from the ERM 'for a few weeks or months', but that he was against floating all the currencies.
Mr Waigel responded: 'I can't see how he can follow the debate from his sick-bed.'
Roland Dumas, a close adviser to President Mitterrand and former French foreign minister, blamed 'Anglo-Saxons' for speculating against the franc in an attempt to halt European integration. Mr Dumas did not blame Britain specifically, but said: 'The construction of Europe and the reinforcement of the Community offends some countries in the world.'
Kenneth Clarke, Chancellor of the Exchequer, said the main emphasis of the meeting was to put the European economy back on the road to growth. 'We will all concentrate on making sure that the European economies come out of recession and recover,' he said.
The French, Belgian, Danish, Spanish and Portuguese currencies are all on the line, with huge pressures building up against them.
Gavyn Davies, page 21
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