The Sterling Crisis: Brussels machine swift to quell fears: Future of the EMS

ITALY and France yesterday called for an emergency summit of EC heads of government after the French referendum. Fears are growing in every EC capital that the collapse of the pound may herald a far more serious crisis that shakes the whole of Europe. The financial explosion raises doubts about both the survival of the European Monetary System (EMS) and the political structures sustaining it.

The Brussels machine moved swiftly yesterday to assure Europe's citzenry that the prospects for economic monetary and political union are not dead, but resting. 'Let's not ask more of the EMS than it can provide,' said Jacques Delors, President of the European Commission. 'It has already done a lot and it will do more, but only through common disciplines and a single currency will we be able to avoid events like those we have experienced,' he said. 'It was better to come to a common decision among 12 (member states), to let these two currencies float,' Mr Delors said.

But it was clear that it was not a common decision. Britain went to Wednesday night's emergency meeting in Brussels saying it wanted a complete suspension of the EMS. Spain argued against suspending the pound and the lira.

Further undermining the appearance of a common front was the sacking of a high-ranking EC official, who worked for Martin Bangemann, Commissioner in charge of industrial policy. Manfred Brunner had, with several German politicians, signed a declaration saying they were 'convinced that the federal state agreed by Western European governments must also be given democratic legitimacy through the approval of the electorate here if it is to last'. Yesterday he was dumped for his heresy, or 'due to fundamental differences regarding the political interpretation of the Maastricht treaty as well as to the wish for a referendum in Germany,' as Mr Bangemann put it.

The assurance that the credibility of the EMS remains intact and that the suspension of the lira and sterling is but temporary was immediately undermined by news from the financial markets. It was predictable that suspension of the pound and lira would knock the stuffing out of the EMS. The Bank of Ireland had to intervene to support the punt, the Danish kroner was trading at its exchange rate mechanism (ERM) floor, Portugal said it might devalue and the Greek drachma wobbled on the edge of devaluation.

Even the French franc came under pressure, though it was defended stoutly by officials in Paris. Michel Sapin, the French Finance Minister, said the franc is one of the strongest EMS currencies. 'The franc belongs to the most solid group of EMS currencies. In the future, its value can only appreciate.'

The attentions of every government in Europe are focused on France. All hopes are still pinned to a 'yes' vote on Sunday on the assumption that the unprecedented events of the last two days have calmed the markets sufficiently to generate a new faith in the ultimate achievement of monetary union on which investor confidence can build once the treaty is out of danger. Such optimism would seem wildly out of kilter with the realities of the political crisis in Britain. The EC's main players are so caught up with domestic politics - the futures of President Mitterrand, Chancellor Kohl and John Major all hang on Sunday's outcome - that many diplomats seem not yet to have grasped what is at stake for the Conservative government. They are optimistic that with a French endorsement of Maastricht, the Danes could be brought back into the fold by effectively adding explanatory notes to the treaty in such a way as to make it acceptable.

A 'no', some argue, still does not imply that Maastricht is dead. It would undoubtedly set things back, the theory goes, but it should be possible to rescue various elements, the need for closer inter-governmental co-operation on interior affairs for example, while other elements such as closer co-operation on foreign and security policy will be forced on the Twelve by events. The result will be Maastricht by another name.

This scenario does not seem to take into account, that unless there is a belief that economic union can work the real logic for closer integration - the creation of a single market and assumptions flowing from that - is dead.

The official Commission line yesterday was that 'in the context of the growing economic interdependence within the Community and globally, these events show how great is the need for stronger economic and monetary co- operation leading to economic and monetary union'. For countries tied to Germany, the imperative to move faster towards monetary union is considerable.

Even senior officals who called the EMS 'a very precious instrument' admitted that 'it needs to strengthen and co-ordinate measures to achieve convergence' and cited the problems Italy has had in implementing necessary economic reforms. Most experts insisted that they expected to see sterling back in the system soon, but no one was prepared to predict how soon. Since sterling's EMS membership is only suspended, the pound will have to return at its original rate. Such a level is clearly unrealistic now that the currency has been allowed to float.

Officials insist the fundamentals underpinning the British economy are by and large sound, implying that sterling has been the victim of the dollar crisis and what one deemed 'intolerable' speculative pressure. 'The EMS is an adjustable parity system I don't think anyone ever believed the stability we have enjoyed for the last four to five years would last for ever,' said a senior monetary source.

The difference nobody would admit yesterday is that never before have economic pressures dovetailed quite so tightly with political instability. The combination threatens to poison the Maastricht process to the point where the political will to make it work, irrespective of the French vote on Sunday, is so weak the treaty cannot be saved.

The political superstructures of Europe have been twisted out of shape as much as the economic base. The Cold War logic of the European Community, the primacy of avoiding another Franco-German war and the necessity of a strong transatlantic link have all been weakened. Party systems are weakening; for socialists, social democrats, conservatives and Christian Democrats alike, the debate on European union undermines old loyalties.

One of the strongest claims to legitimacy that the EC has been able to wield has been the provision of economic stability, welfare and prosperity. All of these are at stake now. Though Brussels may say closer integration is the only answer, a different response is starting to emerge: protection from the cold winds of the world economy, and a focus on domestic worries. It is not a propitious climate for

co-operation.