The Sterling Crisis: Only an emphatic 'oui' will do: Referendum jitters

AFTER THE double rise in British interest rates, European Community officials were under no illusions that only a clear-cut 'yes' vote in Sunday's French referendum can keep the EC alive in its present form.

With the British government struggling to stave off a devaluation of sterling with an interest rate rise of 5 per cent, a senior EC official said other increases - not necessarily in or confined to Britain - could not be ruled out. 'You have to expect that governments will act to defend their currencies,' he said.

For probably the first time in the Community's history, this is a crisis that links, in the public mind, the way the EC is run with one's personal fortunes. Though the strain on sterling and the timing of the French vote are separate issues, as long as the markets wait to act on the French result, the two are inextricably linked.

Until yesterday the official line has been that the lira's devaluation proves the European Monetary System (EMS) works. That is, when the various currencies are too far out of alignment, the central banks act to bring them back into line. It is, however, unclear whether the EMS could survive a sterling crisis. And without the EMS, the arguments for closer monetary union and, hence, political union - in other words, the Maastricht treaty - look weak.

Those who would rescue something from the debacle of a French 'no', argue that the French, in that case, would only have voted 'no' to Maastricht and not to the EC.

'A 'no' certainly wouldn't mean that the majority of the French electorate want to abandon progress towards a united market . . . it would be a reflection of mid- term domestic political factors,' said Sir George Younger, the former secretary of state who is chairman of the Royal Bank of Scotland.

'I do not think that the British economy has got competitive difficulties, I do not think there are underlying economic reasons for a different level of parity,' he said, echoing Theo Waigel, the German Finance Minister, who said on Tuesday that sterling exhibited none of the same fundamental weaknesses as the lira.

If the French do reject Maastricht, it will fall to the UK presidency to clear up the mess. Jacques Delors, the European Commission president who has said he will resign if the vote is 'no', will fly to New York on Monday to join the EC foreign ministers who will be there for the UN General Assembly. An emergency meeting, probably with the EC finance ministers gathered for a G7 meeting in Washington, will be called.

The British will probably stress how much Community business - the implementation of the single market, future financing plans, etc - has still to be completed and does not depend on the Maastricht treaty for its success. But the impossibility of this business as usual approach was proved after the Danish rejection of Maastricht, since when all Euro-business has effectively been on hold. If the French say 'no', there will be many who are reluctant even to return to the drawing board.