Pound gets help from the Germans: EC secures key pledge on interest rates

GERMANY yesterday threw a lifeline to the troubled pound and lira by agreeing not to raise interest rates, but refused to bow to pressure from other countries to promise a reduction.

Norman Lamont, the Chancellor, announced the new German commitment last night after the EC finance ministers' informal meeting in Bath. Theo Waigel, the German Finance Minister, was accused by several countries of contributing to the recession elsewhere in Europe and exacerbating the pressure in the currency markets.

Mr Waigel, who has been under pressure for months from his counterparts to cut German interest rates, insisted defiantly during the meeting that he was 'not prepared to be in the dock either here or in Germany'.

'Cuts in interest rates have to be earned, not decreed,' he said.

The concession wrung from him later in the day, however, is likely to calm the turbulence in the foreign-exchange markets by reducing upward pressure on the already strong German mark.

In response to the crisis in the markets, the ministers took the unusual step of drafting a statement which Mr Lamont read after their meeting. In it, they:

Repeated that they had no plans to consider a realignment of the Exchange Rate Mechanism.

Expressed determination to press on with the policies needed to cut inflation and budget deficits in the EC's weaker economies.

Promised to take 'any opportunity' to lower interest rates as European inflation falls.

Welcomed the Bundesbank's intention not to raise German interest rates.

Speaking of the German promise, Mr Lamont said: 'It's the first time this has been said openly and publicly. Growth in the EC has been slowing, and prospects are not brilliant. Many people would like to see lower interest rates.'

Until the interest rate commitment came from the Bundesbank, Germany's independent central bank which was represented at the ministerial meeting, Mr Lamont had been faced with an unpalatable choice in the coming weeks: either to watch the pound fall back to its ERM floor, or to court political unpopularity by raising interest rates only weeks before next month's Conservative Party conference.

Although investors in the pound are likely to take the statement as good news, Mr Lamont said he would still be willing to raise base rates in Britain if currency intervention fails. 'I have made it clear again and again that we will do whatever is necessary to safeguard the value of the pound. If that necessitates movements on interest rates, we would be willing to take measures,' he said.

John Major, the Prime Minister, will tomorrow confront the possibility of a 'no' vote in France's 20 September referendum on the Maastricht treaty in his first set-piece speech on Europe since European currencies were plunged into turmoil last month. His speech will reaffirm a strong public commitment to last December's Maastricht deal. But he will indicate that, should France vote against Maastricht, Britain would press ahead with its priorities as holder of the EC presidency: the single market, free trade, and the decentralisation and enlargement of the Community.

Some British officials argue that the process of enlargement of the EC would be speeded up without Maastricht. The treaty cannot come into force without ratification by all 12 EC member states.

Yesterday's discussions at the Ecofin meeting in Bath were dominated by the gauntlet of speculation that the finance ministers must run in the fortnight between now and the French referendum. If France votes 'no', European officials believe, pressure for a realignment of currencies is likely to become irresistible.

In recognition of the gravity of the currency crisis, Mr Lamont made a second last-minute change to the ministerial agenda in the morning, opening the meeting with a round-the-table debate on the financial markets which turned out to take most of the day.

The ministers were told yesterday that the European Commission now believes the recession in the EC will be deeper and last longer than it previously hoped. According to figures presented yesterday, EC growth is likely to be 1.25 per cent in 1992 and 1.5 per cent in 1993, both figures sharply lower than estimates only two months ago.