Asked about the UK position, Yves-Thibault de Silguy, Monetary Affairs Commissioner, reminded the British government that, of the five criteria for membership of the single currency, "one of them is ERM".
After issuing a statement praising most aspects of UK economic performance, Mr de Silguy told a press conference: "If and when the UK decides to join the euro it will have to comply with the same conditions as those complied with by the first wave countries." These include sticking to the "margins set out in the ERM," he added.
The Commission statement came in response to the "convergence programme" in which the Treasury outlined how policy would match targets for euro membership. Highlighting worries on exchange-rate fluctuations, Brussels called on the UK to "continue with its stability-oriented framework for macro-economic policy with a view to achieving exchange-rate stability".
It held back from a formal plea to the UK to join the ERM in deference to the British single currency opt-out. By contrast, the Commission said Sweden, the only other EU nation neither in the euro nor the ERM, was expected to join "in due course".
Nevertheless, Mr de Silguy's reminder will embarrass the Government, which knows that re-entering the ERM would be politically explosive. In September 1992, sterling crashed out of the mechanism, undermining the credibility of John Major's administration.
While Tony Blair's government appears anxious to prepare British public opinion for euro entry, Gordon Brown, the Chancellor, has denied any intention to rejoin the ERM. Under the Maastricht Treaty, membership of the ERM for two years is a precondition of entry into monetary union. Since the euro's debut, the mechanism has been replaced by "ERM2", launched with Denmark and Greece as members.
Yesterday Alan Donnelly, leader of the European Parliamentary Labour Party, joined the debate, arguing that the treaty refers to the original ERM, not ERM2, and hence Britain would not be barred from joining immediately after a referendum. He added: "Those who say there is a treaty requirement to join ERM2 are simply wrong. If the fundamental economics are right, membership or otherwise becomes an irrelevance."
Although the 11 member states are unlikely to hold Britain to the letter of the Maastricht Treaty's two-year stipulation, a prolonged period of exchange-rate stability would almost certainly be demanded.
That will be a problem for the Chancellor, and could force him to shadow the euro even if he escapes the full ERM membership provisions. Otherwise Brussels gave the UK a good bill of health, approving "realistic" projections of public finances being close to balance by 2002 and highlighting the rising level of government investment as a share of GDP.
Outlook, page 17