Pedro Solbes, the Spanish economics minister, called for talks between ERM members over the weekend, but the Belgian government said no meeting of the EC's secretive and powerful monetary committee had been called. 'I don't know anything and I can't say anything,' said an official at the committee's office.
The ERM struggled through to the end of the week only at the cost of massive intervention by almost all the system's central banks. For much of the day they were forced to buy unlimited quantities of weak ERM currencies at their lowest permitted rates. Tens of billions of German marks were spent in a vain attempt to lift the weak currencies.
In early morning trading the Bank of France stopped defending its 'line in the sand' of Fr3.4180 to the mark. Almost instantaneously the franc plummeted to its floor of Fr3.4305, where it was pinned for most of the rest of the day, with some dealers reporting that it fell periodically below its floor. After European trading, when ERM parities no longer have to be defended, the franc plunged decisively through the floor.
George Soros, the New York-based currency speculator who made dollars 1bn gambling on the pound's devaluation, declared the defence of the franc to be hopeless and reversed an earlier commitment not to speculate against it. 'I do not expect the ERM to continue functioning. I do not expect the present arrangement to be operative Monday morning', he said.
Edouard Balladur, the French Prime Minister, said that the system depended 'on the goodwill of each and every one'. Mr Balladur has threatened to resign before he allows the franc to be devalued.
The Belgian franc, Danish krone, Spanish peseta and Portuguese escudo all hit or came close to their ERM floors. Belgium raised official interest rates and Denmark squeezed its market rates higher in an attempt to help their currencies, but to no avail.
The pound remained a beneficiary of the chaos, despite growing hopes that the Chancellor will cut British interest rates in the wake of an ERM collapse. Devaluation of the French franc, the Spanish peseta and Portuguese escudo would make many holidays cheaper for British tourists.
Deep splits in the European Community began to emerge as a day of ferocious political speculation was marked by an almost complete lack of public comment on the crisis. Instead EC leaders said only that the ERM was functioning as it should. They resisted calls for a realignment and said that monetary co-operation was vital to the Community.
'We must assure that the EMS functions, it's essential for Europe,' said Jean-Luc Dehaene, the Belgian Prime Minister. He insisted, as did French, Dutch and German officials, that the system was working.
But there was evidence of deep diferences about the causes and solutions of the problem. Mr Dehaene said the mechanism was 'based on mutual solidarity between different currencies and different policies'. Asked whether Germany had respected this, he said: 'It's up to them to examine their own consciences.'
In addition to intervening, the Bundesbank belatedly tried to help to salvage the ERM by allowing German market interest rates to fall below the discount rate of 6.75 per cent, which normally acts as a floor. This amounted to granting the discount rate cut which the Bundesbank council had withheld on Thursday.
Johann Gaddum, a Bundesbank board member, said the move was a deliberate change in monetary policy rather than a technical change. The U-turn was seen by some analysts as a challenge to the authority of the policy-making council, in which the Frankfurt directorate shares power with regional Bundesbank chiefs.
'Allowing market rates to fall below the discount rate is a discount cut by another name, but it is not a big enough carrot to keep the system together', said Kit Juckes, of the City firm Warburg Securities. He added that Mr Gaddum had damaged the Bundesbank's credibility by appearing to backpedal so quickly.
The ERM crisis stems from the need in many member countries to cut interest rates to lift economies out of recession. However, ERM rules mean they must match German rates - held up by high German inflation and money supply growth - to stop their currencies falling too far against the mark. The speculation reflects the belief that the need for lower rates is more pressing than the desire to stay linked to the mark.
The cost of high interest rates in France was brought home by the publication of June unemployment figures showing a 44,600 monthly rise in the total to a fresh post-Second World War record of 3,185,800.
The monetary committee could agree a realignment of the system, lowering the bands within which ERM currencies are able to vary against the mark. But analysts doubt that would allow interest rates to fall far enough in France and other depressed ERM economies. So a suspension is thought more likely, with some rumours of a move to fix irrevocably the franc-mark exchange rate.
All the options are either politically or economically painful, most both. It has been taboo to question the ERM's functioning, and a report from the monetary committee recommended no fundamental change. Attempts to stiffen its operation were resisted by the Bundesbank, said sources who had read the report.
Maastricht wounds reopen, page 2
Good news for tourists, page 3
Leading article, page 16
French unemployment, page 19
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