Europe urges Britain to rejoin ERM

BRITAIN IS under pressure to join a new version of the exchange rate mechanism, from which the pound was ejected six years ago. The moves threaten to cause an rift between the Chancellor, Gordon Brown, and his European counterparts.

A 12-point plan, tabled at the weekend by the French finance minister, Dominique Strauss-Kahn, at an informal meeting of finance ministers in Vienna, urged Britain to join "as soon as possible".

Two other European finance ministers, Gerrit Zalm of the Netherlands and Charlie McCreevy of Ireland, made the same appeal, one warning that a "jaundiced view" would be taken if Britain decided to stay outside "ERM2" until the single currency was a success, and then applied to join.

Of the 15 European Union states only Britain and Sweden intend to stay out of ERM2, which is launched with the euro on 1 January. Denmark and Greece signed up on Saturday.

European finance ministers see the new exchange rate mechanism as a way of extending the euro-zone, which has been a bulwark against the kind of turbulence sweeping South-East Asia and Russia.

British hostility to re-entry is rooted in the pound's ignominious withdrawal from the mechanism, under which parities were fixed within bands.

Failure to join ERM2 could jeopardise Britain's prospects of entering the single currency if it wants to do so. Under the Maastricht treaty, membership of ERM for two years is a precondition of entry. Britain's entry could be vetoed by any member state if it has not been part of the ERM.

At the minimum, other European countries would want to see a two-year period of exchange rate stability for the pound.

That raises the prospect of Britain having to shadow the euro, within a margin of around 15 per cent, if Mr Brown wants to keep open the option of membership of EMU early in the next parliament.