Currency club may split EU, warns Brown

A new 'economic government' reserved exclusively for members of the single currency could split the European Union, the Chancellor Gordon Brown warned in Brussels yesterday. Katherine Butler watched mounting anxiety at the erosion of British influence as France and Germany stood firm against his demands for admission to an inner circle to manage the euro.

EU ministers were battling to avert their first full-scale crisis with the Blair government last night as a rift deepened over a club which would exclude countries not participating in the single currency.

It was the kind of public squabble that recalled the worst hostility of the Tory years, and which Labour had once insisted would never recur once they took office.

Mr Brown warned a two-tier Europe would erode the "common interest" principle which is written into the EU treaty and which has underpinned the Union since its foundation. He protested strongly about the wide range of economic matters which its supporters want the new body, known for now as Euro- X, to cover.

But the resolve of the French and Germans, who have masterminded the new council, appeared stronger than ever as they asserted the right of single currency members to exclude "outsiders" from their club.

Theo Waigel, Germany's finance minister, said: "You cannot be both in and out." The French said they had the full backing of the eleven member states who expect to be in the euro zone in the first wave.

Luxembourg, which holds the EU presidency, and the European Commission were working frantically last night to build bridges. They presented a compromise which would offer Britain Sweden Denmark and Greece, all of whom are expected to remain outside the single currency in 1999, a guaranteed flow of information on what is discussed inside Euro-X.

But the plan, to allow the European Commission to sit in on discussions and then inform the outs, was rubbished by British officials who said it offered nothing new. "We want a voice at the table not an ear at the door," said one source.

Germany insisted there would be no "discrimination" against the outsiders and said there would be no attempt to set up a secretive body but said there was nothing Britain could legally do to stop Euro-X from going ahead.

It now seems inevitable that the row will have to be referred to the summit of EU leaders in two weeks' time. "We would expect it to go to the summit," said a British spokesman.

Britain's dilemma is that short of accepting an unsatisfactory compromise which ensures it is, at best, kept informed of discussions inside Euro- X, there is little it can do. One tactic being hinted at last night is the threat that Britain will invoke the EU treaty to prevent members of the inner circle from using EU-funded buildings or catering facilities for their meetings.

The denial of full participation on the new body, even if it is as the Germans claim "informal", means Britain will have little scope to exert influence over discussions on such matters as budgetary policy, fiscal harmonisation, labour market reforms, wages policy, and the external exchange rate policy of the Euro-zone.

Under the Franco-German plan, Euro-X's remit would extend far beyond technical management of the currency. An example is the French plan to introduce a 35-hour week, which after the launch of the single currency could have a much greater impact on member economies.

London (Reuters) - Emu member countries could put Britain under political pressure if the pound should fall sharply against the euro at some stage in the future, Robin Cook, the Foreign Secretary, said yesterday.

Questioned by Commons Foreign Affairs Committee on how much influence Emu members would have over British exchange rate policy, Mr Cook answered that they would have no binding legal powers.

Mr Cook was asked whether the pound might be forced to shadow or follow the single currency before Britain joined it.

"I think the position is that we cannot be legally compelled to do so," he said. But some Emu member states were motivated by "weariness with what they see as unfair depreciation of other people's currencies.

"Without doubt if the single currency was to find itself appreciating against sterling, or we were seen to be depreciating, we would come under political pressure."