The Bundesbank was accused of leaking to the press a confidential statement to the British government by Helmut Schlesinger, president of the German central bank. It rebutted Britain's claims that it had been largely to blame for the run on the pound which forced sterling out of the ERM. The Bundesbank said that it had fulfilled completely its obligations under the ERM and spent the larger part of DM44bn (pounds17.5bn) on defending the pound when it was pinned to its floor.
After a day of talks with the leaders of Germany, France and Denmark to repair some of the diplomatic damage over the ERM and Maastricht treaty, the Prime Minister - who had been unaware of the leak until questioned by reporters - made his anger clear by attaching his name with Douglas Hurd, the Foreign Secretary, to a Treasury statement attacking the German embassy for releasing the confidential paper.
The Bundesbank's action infuriated ministers and will strengthen Tory opponents of Maastricht, making it more difficult for Mr Major to sell the rescue package to his party's conference next week.
The Prime Minister's statement said that on Monday the German ambassador called on the Permanent Under-Secretary to the Foreign Office and handed over a paper sent to him personally by the Bundesbank president.
'The paper sought to rebut allegations over the Bundesbank's recent conduct in relation to sterling. The ambassador asked that paper to be considered confidential. Earlier today, and without warning, the German embassy, on behalf of the Bundesbank, made available an almost complete version of the paper.'
It came after the German Finance Minister, Theo Waigel, appeared to contradict the assurances given earlier in the day by Chancellor Helmut Kohl to Mr Major that there would no two-speed Europe. The minister said a small group of European countries could proceed with monetary union, based on a 'Euro-mark'.
British ministers were left wondering about the German motives for causing the renewed row, which threatens to take relations between Bonn and London to a new low. There was speculation that the Bundesbank may be seeking to undermine the position of Norman Lamont, the Chancellor, who opposes moves towards a single European currency.
British ministers will want to know whether the German bank and the minister were acting in concert. Their actions appeared to undermine the effort of Chancellor Kohl to rebuild bridges.
The German finance ministry embarked on a rapid damage limitation exercise last night concerning the remarks by Mr Waigel in an interview to be published today in Nordkurier.
He suggests that a future joint European currency zone would have the mark as its anchor, which would develop into a joint currency to be called the Europa-Mark. Johannes Scheube, a ministry spokesman, said: 'The term Europa-mark should not be taken to denote the domination of any one country within the Community. That would be a gross misunderstanding of what Mr Waigel is suggesting. The aim is simply to find a name that is less technical-sounding than the Ecu and one with which people can feel more at home.'
In the article, Mr Waigel says that 'there are no barriers against including the Benelux countries and Denmark,' adding that such a Europe would also be possible with Austria and Switzerland - not members of the EC.
Downing Street officials were last night seeking clarification of the minister's remarks, which came after a successful visit Mr Major made to President Francois Mitterrand in Paris, in which the two leaders agreed there would be no two-speed Europe.
The impression given last night was that Mr Major was putting together a package which would satisfy Danish and British reservations about Maastricht, and making progress on Britain's requirements for reforms of the ERM before re-entry. After meeting the Danish Prime Minister, Poul Schluter, last night at Admiralty House in London, Mr Major said: 'We are gradually beginning to piece together the way we might move forward from the present difficulties.'
German and British officials are trying to find the basis of a summit agreement for attaching a protocol to the treaty spelling out principles of subsidiarity, under which states will take decisions at national level where possible.
But the mistrust caused between Bonn and London by these new diplomatic rows could upset Mr Major's plans.
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