Last-chance summit to save ERM

EUROPEAN finance ministers, including Britain's Kenneth Clarke, are to meet for emergency talks today in a desperate effort to save the European exchange rate mechanism.

The ministers were summoned to Brussels when it became clear a meeting of senior officials yesterday could not resolve the crisis brought on by a week of frantic speculation. Central banks spent billions of German marks propping up the franc and other currencies last week, but failed to relieve pressure on the system.

The EC monetary committee broke up without result last night after almost five hours of talks, but even before it met Germany had anticipated failure by asking for a full ministerial meeting. Central bank governors, including Britain's Eddie George, will also attend today.

The calling of a ministerial meeting implies that a complete overhaul - or even dismantling - of the ERM may be considered. The committee has discussed a range of options to put before the finance ministers. These are thought to include:

Widening the 2.25 per cent bands within which the franc and most other currencies are allowed to vary around their central rates against the German mark. This has been discussed privately between France and Germany.

Accelerating the move to monetary union, irrevocably fixing exchange rates within a 'hard core'. This would be resisted strongly by the Bundesbank, which precipitated the crisis last Thursday by unexpectedly refusing to cut its key discount interest rate.

Temporary suspension of the ERM, allowing member currencies to float freely. The difficulty would be agreeing when and how to reconsitute the system.

Splitting the ERM into two tiers, with the German mark and Dutch guilder linked in one, and all the rest in the other. The two tiers would then be free to float against each other. This amounts to floating the mark.

Edouard Balladur, the French prime minister, spent yesterday discussing the crisis with senior advisers in Paris, having earlier said he would resign rather than devalue. The French press blamed Germany for pushing the ERM to the brink of collapse, with the right-wing Le Quotidien de Paris warning Bonn that 'the consequences of this Prussian obstinacy may seriously jeopardise its own remaining prosperity'.

Anibal Cavaco Silva, the Portuguese prime minister, said he hoped 'Germany would see that it has to make a contribution towards the stability of the system.' Albert Reynolds, the Irish prime minister, said: 'The ERM is at a crossroads this weekend and something has got to give.'

The franc has come under pressure because France desperately needs lower interest rates to revive its economy and reduce unemployment, which rose last week to a fresh post-war record of 3,185,800. The Bundesbank, whose priority is to contain German inflation, has insisted on keeping interest rates high.

Theo Waigel, the German finance minister, defended his central bank. 'The Bundesbank has thought long and hard about each decision, and has considered not only domestic but also international economic factors,' he said. Stressing that the ERM was 'still useful, valuable and necessary', he said: 'I believe that it will survive the current crisis.'

The financier George Soros, whose heavy selling helped drive the pound out of the ERM last September, took a different view: 'I think the franc has fallen. If the government doesn't accept it, then the markets will force events . . . I don't believe the system will be there on Monday.'

Britain's representatives at yesterday's talks were understood to have taken a back seat, the pound having left the ERM last September. But many in the Government hope interest rates will in Britain as a result of the crisis, as rates fall across Europe either because of the ERM's collapse or as the price of its survival.

Euromoney collapse, page 2; Leading article, page 20; Slaying the ERM, Business Section