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
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
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 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. …