EC gives currencies more breathing room Ministers dilute monetary system

August 02, 1993|By Joel Havemann | Joel Havemann,Los Angeles Times

In a move that cast new gloom over Europe's ambitions to become a unified economic power on the world stage, European Community finance ministers early today diluted their foundering system of fixed exchange rates, nearly to the vanishing point.

The modification will effectively allow other EC currencies in the system, including the French franc, to be devalued by slightly more than 13 percent against the German mark, the EC's strongest currency.

No currency was actually devalued, however. Instead, the finance ministers decided that each currency would be permitted to lose up to 15 percent of its value against the EC's strongest currency. Previously the widest swing had been only 2.25 percent for all currencies except those of Spain and Portugal, which had been allowed a 6 percent range.

British Chancellor of the Exchequer Kenneth Clarke admitted that the changes "certainly give a great deal of flexibility. . . . But it's still the system."

French Finance Minister Edmond Alphandery said that he believed the French franc could survive under the new guidelines. Under the old, the French and German governments had been forced to intervene massively in the private currency markets to keep their public promise not to let the franc fall below its former minimum value against the mark.

That effort would now probably prove to cost France and Germany the equivalent of billions of dollars. The profits will go to the international currency traders, representing pension funds, investment funds and others with huge sums of money at their disposal in a trade estimated at $1 trillion a day on currency markets all around the world.

When markets open today, traders are expected to drive all the weak EC currencies down toward their new minimum levels. These are not only the French franc but also the Belgian franc, the Danish krone, the Spanish peseta and the Portuguese escudo.

The exchange-rate system was to have been one step on the way to a common European currency by the end of the decade.

Analysts said that goal now appears impossible except perhaps for the German mark, the Dutch guilder and two strong non-EC currencies, the Swiss franc and the Austrian shilling. However, at the end of 20 hours of weekend meetings, the EC finance ministers declared themselves still committed the the goal of single currency.

The immediate cause of Europe's latest currency crisis was Thursday's decision by Germany's central bank to make only a token reduction in interest rates. Most analysts predicted that Europe's extensive exchange-rate system could not survive that decision.

Germany's high rates, by making German investments attractive, inflated the German mark's value and made it all but impossible for the EC's weaker economies to keep up.

Scrapping the exchange-rate system was one of the options on the agenda when European economic officials began meeting Saturday for what turned out to be two long days of bargaining. But it was not one that many favored.

The exchange-rate system, adopted in 1979 to bring stability to Europe's finances, has instead become a source of instability. It has temporarily contained pressure to make small adjustments in one currency's value against another.

But that has merely allowed the pressure to build to levels that have ripped part of the system away. The last major explosion occurred last September, when the British pound and the Italian lira were forced out of the system altogether.

The British and Italian governments, whose economies were among the EC's weakest, could not tolerate the high interest rates that would have been required to maintain their currencies' value against the mark.

Germany has kept rates high -- its minimum rate for overnight bank loans is still 7.75 percent -- to control an inflation rate that remains stubbornly above 4 percent.

But high interest rates, by attracting investments, make a currency strong. Germany's rates have forced the other countries in Europe's currency system to keep pace. That in turn has slowed or reversed economic growth in much of Europe and sent unemployment rates in many EC countries into double digits.

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