Speculators humiliate ERM: European politicians blame Germany for collapse of system as central banks let weak currencies slide

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The Independent Online
CURRENCY speculators and international investors celebrated victory over the European Community yesterday as weak currencies in the now- defunct European exchange rate mechanism were savaged and Germany was angrily blamed for the system's collapse.

European politicans said Germany had failed to respect its obligations within the ERM and had triggered its death. The European Commission warned that the dismantling of the ERM and its economic consequences threatened to put countries at each others' throats and wreck the single market.

The ERM was pronounced all but dead after the meeting of finance ministers and central bank governors broke up early yesterday. They let all currencies apart from the German mark and Dutch guilder fluctuate by up to 15 per cent from their central rate.

Economists said the widening of the bands was purely cosmetic and that Europe had readopted a system of floating exchange rates after

14 years in which the ERM had been the cornerstone of European economic co-operation.

The weak ERM currencies promptly fell below their former floors in the system as dealers tried to work out appropriate levels for each currency in hectic trading.

The French franc dropped as much as 10 centimes - or 3 per cent - to a low of about Fr3.53 to the mark, before recovering to around Fr3.5065. Its old ERM floor was Fr3.4305. The French government said it was determined to defend the franc, but it could take weeks for its correct value to become clear.

The Danish krone suffered most, falling nearly 7 per cent at one stage to DKr4.1550 to the mark. The Spanish peseta dropped 2 per cent at worst, with the Portuguese escudo recording a slightly larger fall of 2.3 per cent.

Most central banks were content to let their currencies slide, although Belgium intervened to support the Belgian franc, which fell 2.1 per cent to BFr21.48 at one stage.

The intervention reflected the reluctance of Belgium to give up its place in the ERM 'hard core' with the German mark and Dutch guilder. Belgium's desire to stick with its old 2.25 per cent bands - like the mark and the guilder - was one of the main sticking points at Sunday's negotiations in Brussels.

The ERM's de facto suspension came after massive speculative attacks against the system last week. Helmut Schlesinger, the Bundesbank president, said the German central bank had spent DM60bn ( pounds 24bn) last week supporting weak currencies.

Most ERM members are now expected to cut their interest rates by between two and three percentage points by the end of the year. The greater exchange rate flexibility means other European rates no longer have to be at or above German levels.

The French government was understood not to have cut rates straight away in an attempt to prevent a spectacular collapse in the franc handing large profits to the speculators. But many speculators appeared happy to wait in the knowledge that Paris would not resist lower rates for long.

The interest rate cuts are expected to herald further falls in the weak ERM currencies. The new bands are not expected to be stretched although some believe the peseta and escudo could fall close to their new floors.

Some economists fear 1930s-style 'beggar my neighbour' devaluations, as countries try to boost exports and ward off imports by depressing their currencies with successive interest rate cuts. 'It is important there is not a slide towards competing devaluations,' said Henning Christophersen, the EC's economic affairs commissioner.

None the less, falling currencies and interest rates are expected to help to lift Europe's economies out of recession, reducing the record unemployment in many of the countries. But the boost to growth is expected to be neither swift nor spectacular, and could be preceded by a damaging fall in business and consumer confidence in the aftermath of the political and exchange rate crises.

British exporters would gain if European economies recovered more quickly, but would lose out if their currencies fell too far against the pound. British holidaymakers to Europe are likely to benefit by getting more foreign currency for pounds.

John Major said the widening of ERM bands was an 'opportunity for lower interest rates and a stimulus to economic growth'. He added that the EC's timetable for monetary union was unrealistic. Kenneth Clarke, the Chancellor, denied the ERM debacle would push him into an early cut in British interest rates. Norman Lamont, the former Chancellor, said the Maastricht treaty was dead.

Sunday's meeting was proof of Germany's domination of EC monetary arrangements. Germany gave no guarantees on dropping interest rates, and yesterday Theo Waigel, the German finance minister, reiterated that a new European Central Bank had to be located in Germany.

Despite 23 hours of talks, no other way of saving the system could be found than to loosen its disciplines, according to officials. They said that if that had not been agreed, the EMS was to have been suspended - a situation supported only by Spain.

The agreement sparked bitter exchanges, with some blaming Germany for its inflexible policy. 'The cause of this speculation is the persistence of high interest rates in Germany caused by the financing costs of reunification,' said Edouard Balladur, the French Prime Minister.

'The speculators succeeded in driving a wedge between France and Germany,' concluded Erik Hoffmeyer, Governor of Denmark's central bank.

But it was not just France which blamed the Germans. Asked if he thought all countries had respected their obligations to defend other currencies in the European Monetary System, Wim Kok, the Dutch finance minister, said yesterday: 'No, I am not satisfied.'

Some politicians were openly questioning the wisdom of the Maastricht treaty - the first time such doubts have surfaced publicly. 'It wasn't an easy birth and it isn't a pretty child,' said Mr Kok. He said he now doubted whether 1997 was a plausible date for forming a single currency.

No process for returning to the tighter disciplines of the EMS was agreed, and this will be the subject of later discussions. The Commission is also meeting this Friday to discuss the consequences of the EMS break- up for the Community.

(Photograph omitted)

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