Britain must rejoin ERM before entering single currency

Tony Blair's plans to take Britain into the euro faced a huge new obstacle when senior EU officials demanded that Britain rejoin the European exchange-rate mechanism before being admitted to the single currency.</p>Although the European Commission is keen for Britain to join the euro, ERM membership remains an unresolved problem because the Maastricht Treaty requires countries to spend two years in it before they can join the single currency, to prevent big fluctuations in the foreign exchange markets.</p>The Commission's hard line, which emerged in Brussels yesterday, means the ERM could become an important issue in a referendum on euro membership. Britain was forced out of the ERM in September 1992 in one of the Major government's most humiliating episodes, from which it never recovered in the polls.</p>Resuming membership is seen by the Government as politically impossible. The Treasury said last night: "We have no intention of rejoining the ERM." A final decision does not need to be taken until after a British referendum, and some believe that if the Government wins a "yes" vote, it would then swallow its pride and embrace the ERM for a brief period.</p>Until recently, officials in Brussels encouraged Britain's belief that the rules could be circumvented if there was a sustained period of exchange-rate stability between the pound and the euro.</p>But the Commission has revised its view because of the EU's eastwards expansion, which is due in 2004. With nations including Latvia and Slovakia poised to join the EU, Brussels is determined to have a tough and consistent set of rules to determine when it is right for them to join the euro.</p>A failure to do so could weaken the new currency, which has been buoyed by the successful launch of euro notes and coins on 1 January.</p>One senior EU official said any application from Britain or Sweden, which may also hold a referendum, would set a precedent for the ability of Brussels to stick to its rules. "We have to set in place a system which works for the applicant countries," he said.</p>Another source said that, while Britain was unlikely to be held to the two-year requirement, it would still have to spend some time in the newly revised ERM II. Britain will argue that the rules were interpreted flexibly to allow Italy and Finland to join the euro even though they had not been in the ERM for two years.</p>ERM II, set in place after the euro, has one country, Denmark. It requires countries to stay within a 15 per cent band. </p>