Maastricht: Brittan proposal for ERM is denounced: Rejoining at a price

BRUSSELS - Cynics yesterday were quick to denounce Sir Leon Brittan's proposal for a modified European exchange rate mechanism (ERM) as a clever design for a stable door whose horse has already bolted.

What ejected sterling from the ERM, they insist, was not the rules of the system itself but the tactlessness of the Bundesbank and the bad policy decisions of the Treasury. Had it handled last month's crisis correctly, Britain might have held the pound steady against the German mark.

Sir Leon's proposal makes it easier for the pound to rejoin the ERM only at a price: by introducing a 30-day cooling-off period in which the Government can consider its options after a speculative attack on sterling, the plan would actually increase fluctuations in the value of the currency.

It would make life easier for governments and central banks, who would be able to think before spending billions in defence of an unrealistic exchange rate. But the idea is not an alternative to the ERM. It is being billed as a 'three-quarter-way house' to help get the pound back in.

Sir Leon's scheme offers a way to get sterling back into Europe long before it would be possible under the existing ERM rules. If the other 11 EC countries accepted the proposal, Britain would once again be able to call on the support of 11 central banks whenever sterling runs into trouble.

The new plan, however, concedes something crucial. By allowing the pound to fall out of its band for up to 30 days, the new rules would give investors an opportunity that they have never had before to pass public judgement on its central rate.

If they sold sterling and drove down its value, a clear signal would be sent to the Treasury: 'We think the pound is overvalued. What are you going to do about it?'

The Government never had to answer this question while the old ERM was operating almost as a fixed-rate system: it kept the pound at DM2.95 for months after economists began to mutter that it was overvalued.

Under the new system, the Treasury would be forced to keep the pound close to its market rate in the long term. That would mean more frequent realignments.

Sir Leon and his advisers do not think that a problem. Indeed, they believe it was a mistake for the Government to turn a deaf ear when the markets were trying to tell it something.

But this difference removes one of the key political attractions of the ERM for the Government - the fact that while it lasted, the system allowed ministers not to have to take politically difficult decisions to devalue.

Whether John Major, who met Sir Leon yesterday, would be willing to bring sterling back to the ERM on such terms is unclear. 'That was just a first salvo,' said a Commission official yesterday briskly. 'We'll be following it up.'

Downing Street last night rejected Labour demands for a leaks inquiry and said the Government had authorised a 'courtesy call' to Lord Lawson telling the former Chancellor that the pound had been withdrawn from the exchange rate mechanism before it was announced.

The Prime Minister's office said: 'There was a courtesy call to Lord Lawson in view of his close connections to the ERM.'