Euro plan will cut Britain out

Brussels - France and Germany have agreed to set up a powerful new political body to make European economic policy, which would exclude Britain if it stays outside the single currency.

After months of secret negotiations, France and Germany have hammered out agreement on a "stability council" to govern the euro-zone, senior officials in Bonn have told The Independent.

Under the deal, both sides have pledged that no formal announcement on the shape of the council will be made until near the launch of monetary union.

But details obtained by The Independent confirm British fears that exclusion from monetary union would deprive Britain of influence over key decisions affecting the country's future.

Only countries who join monetary union will be part of the stability council, which looks certain to become the most powerful economic club in Europe, after the single currency launch in 1999. The council will be styled on the G7, the Group of Seven industrial nations, and will meet regularly to set strategy on exchange rates, employment and issues such as tax harmonisation, German officials say.

The council, consisting of finance ministers of the EMU states, will also reach agreements among themselves on enforcement of the rules and fines governing the euro-zone, under the stability pact. The future European central bank may be invited to meetings of the stability council, which are expected to take place several times a year. They will probably happen just before the regular meetings of the European Union's finance ministers council in Brussels or Luxembourg.

Officials say it has not yet been decided whether to invite the European Commission to sit on the stability council. "We have not thought about whether the Commission should be there - maybe they should," one official said. Germany has been resisting a French proposal for a full-blown "economic government" for the euro-zone, saying the idea could threaten the independence of the future Central Bank. The Commission is opposed to any informal power centre which could undermine its influence over European policy.

However, following months of intense negotiations between France and Germany, a compromise over the stability council has now been struck. "We now have agreement on how the council will work," said a senior German official. Both the German Bundesbank, and the European Monetary Institute, the central bank in waiting, are understood to have accepted the blueprint.

Speaking at the world economic forum in Davos, Switzerland, at the weekend, Theo Waigel, the German Finance Minister, and Jean-Claude Trichet, governor of the French central bank, for the first time publicly voiced strong support for the idea.

They said that the stability council would co-ordinate policy among governments inside the euro-zone. "This kind of body makes sense for countries in the third stage of economic and currency union," said Mr Waigel, referring to the single currency launch. "A stability council would be an informal body with no decision-making power," he added, playing down fears that the council could become a serious political counter-weight to the Central Bank. The Franco-German deal will fuel fears in Britain that a "hard-core" Europe is evolving which could lead to Britain's permanent isolation.

Kenneth Clarke, the Chancellor, has said he is "wary" of any plan for a stability council which would exclude countries outside EMU. Mr Clarke has argued that economic policy-making for the euro-zone should be set by the council of European finance ministers, on which Britain has a seat.

The stability council, however, will operate outside the EU treaties, which means Britain will have no power to influence discussions. Britain's partners are showing increasing frustration with the Government's intransigence over further power-sharing and have now shown they are determined to move ahead alone, even if this means pooling more powers outside the treaties.

"If Britain is worried about isolation they should join in monetary union," said one senior German source. The Franco-German deal involved a compromise from Bonn and Paris over the powers of the new council. French integrationists wanted the council to be granted decision-making authority with direct political powers to influence the European central bank. However, Germany insisted that nothing would be done which affected the bank's independence and its sole right to agree monetary policy, as set out under the Maastricht treaty.

As a result it was agreed that the stability council should be set up without any institutional structure or formal powers, and without a secretariat. Bonn has, however, accepted that the council will enter into "dialogue" with the central bank which cannot "act in a political vacuum", Bonn officials say.