Germany sets conditions for ERM re-entry

GERMANY set new conditions yesterday on Britain's re-entry into the European exchange rate mechanism, saying that it would be subject to a vote by other members.

The unusual statement was made by Helmut Schlesinger, president of the Bundesbank, whose relations with Norman Lamont reached a nadir during this weekend's high-level international meetings in Washington.

Mr Schlesinger, attending the annual meeting of the International Monetary Fund, also said that the level of British interest rates would play a 'significant' role in determining whether other states would approve sterling rejoining the system. His remarks appeared to be a warning that Britain should be cautious about lowering rates now that the pound is floating.

But speculation that Mr Lamont will cut interest rates before Thursday's emergency debate on the economy continued to mount in the City, pushing the pound down by more than seven pfennigs from Friday's closing level to DM2.5376. The key market interest rates which show the City's expectations for base rates dropped sharply below the current base rate of 10 per cent.

The ERM remained tense in the aftermath of the French vote on Maastricht, with dealers not ruling out a full-scale speculative attack on the French franc. The Bank of France was reporting to be buying francs to prop up the currency yesterday morning, but it ended the day less than a centime above its floor. The Irish punt and Danish krona remained under pressure, while Belgium and the Netherlands attempted to reduce the strength of their currencies by trimming interest rates.

Britain's call for reform of the ERM, one of its main conditions of re-entry, also suffered an apparent rebuff from Germany.

Theo Waigel, the German finance minister, claimed that Mr Lamont did not formally ask for reform at a meeting of EC finance ministers on Sunday.

Nevertheless, Mr Lamont won qualified support yesterday from France and the European Commission. Michel Sapin, the French Finance Minister, said that the ERM had experienced unprecedented tension from which it had not emerged unscathed. 'Next time, the ERM must be better, more robust.'

Henning Christophersen, Vice- President of the European Commission, emphasised that it was in Britain's long-term interest to re- enter the system if it wanted to regain stability of interest and exchange rates. He shared the view that the ERM could be reformed, at least technically, saying that the system could take more account of the underlying economic tensions in members.

Other European ministers joined the Chancellor in taking a cautious line on official interest rate cuts in view of the continuing volatility on the currency markets.

Mr Sapin, who before the referendum appeared to promise a cut if the treaty was approved, said that recent turmoil would have to be digested before official rates were lowered.

Mr Schlesinger acknowledged that market rates had fallen but warned that although official rates would be reviewed by the Bundesbank council next week, the central bank saw no room for lower rates at last week's meeting.