Currency Turmoil Rattles Europe Extreme Exchange-Rate Fluctuation Eludes the Control of Nations' Central Banks

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EUROPEAN Community governments have launched a drive to find a fresh formula to ensure the long-term stability of their countries' currencies and stave off the collapse of their commitment to economic and political unity.

After a week of turmoil on European money markets, EC finance ministers held an emergency meeting in Brussels yesterday amid indications that the exchange rate mechanism (ERM) set up in 1979 to stabilize European currencies was on the point of collapse.

What a British banker described as "the critical phase" of the crisis was triggered on Thursday when, against widespread expectations, Germany's Bundesbank in Frankfurt failed to lower its key interest rate - a move that would have eased pressure on the French franc.

This produced a run on the franc and the currencies of Belgium, Spain, Portugal, and Denmark and forced central banks to mount massive interventions as billions were traded across the exchanges. The banks spent an estimated $57.9 billion last week trying to prop up the beleaguered currencies, a London broker said.

After a meeting of EC officials and bankers on Saturday, British sources forecast that the ERM would have to be restructured to allow the franc and other weak currencies to fluctuate more widely in relation to the strong German mark.

George Soros, an international financier who made $1 billion in currency speculation last September before Britain was forced to devalue the pound in an earlier round of currency turmoil, said: "The ERM in its present form is dead. A new system must be found."

Attempts to confront what British and other EC bankers say is Europe's worst currency crisis since 1945 have two main aims. In the short term, EC governments are determined to put an end to what Gavin Davies, chief economist of Goldman Sachs, called "savage buying and selling" on European markets. There were concerns the foreign-exchange markets would be even wilder today.

EC governments' longer-term aim is to salvage the goal of achieving a single currency enshrined in the Maastricht Treaty on European integration.

The ERM was intended as a step towards a single currency, and its collapse would mean EC leaders having to begin all over again to find a formula for creating the "ever closer union" envisaged in the treaty.

The Bundesbank's failure to cut its key discount rate by the one-half percent that had been confidently expected in Paris and other capitals angered French Prime Minister Edouard Balladur, French government sources said. Earlier in the week he had said he would resign if the franc had to be devalued.

CLOSE relations between the Bonn and Paris governments are widely seen as a cornerstone of EC unity. A French Foreign Ministry source said: "Ties have been placed under enormous strain by the Bundesbank's determination to take its own decisions, regardless of what the German government or any other government wants. …