Major looks at scheme to return to ERM

Click to follow
THE GOVERNMENT is studying a proposal to return to the European exchange rate mechanism (ERM) under new rules that would allow the pound to fall freely for up to a month, Treasury officials confirmed yesterday.

Sir Leon Brittan, a vice-president of the European Commission, explained the proposal to John Major at a lunchtime meeting in London yesterday. He said Britain would no longer face the stark choice of allowing the pound to float or undertaking to keep it within 6 per cent of a publicly announced exchange rate, as rules currently require.

Instead, the 6 per cent range would be a 'target'. If investors began to sell the pound heavily, the Treasury and Bank of England would be able to respond by letting it fall freely. Only after 30 days would they have to choose between devaluing or buying sterling to drive it back to an agreed range. The plan, conceived by two senior Commission advisers but adopted by Sir Leon and advocated in an article in the Financial Times yesterday, is designed to help to bring sterling gradually back into the ERM and eventually into a single European currency.

Without such a strategy, they fear, the Government might be unable to rejoin the mechanism for fear that its dented credibility would send investors fleeing the pound at the first sign of crisis.

The Commission recognises sterling faced special difficulties inside the mechanism as Europe's second-most traded currency after the mark. Had the French franc been as widely traded, one Commission specialist said yesterday, it, too, would have been ejected from the ERM.