Currency Crisis Reaches Deeper in Europe; Lira Slides : Finance: Germany refuses to cut interest rates that most other nations blame for the chaos. The franc faces pressure but the British pound grows stronger.

Europe’s currency crisis deepened Thursday as the Italian lira plummeted in value and the Irish punt, the Danish krone and even the powerful French franc came under intense selling pressure. But Germany refused to cut the high interest rates that most other European nations blame for the tumult.

One bright spot was the British pound, which grew stronger even though the British government reduced interest rates one day after abandoning its ultimately futile effort to prop up the currency’s value. And the Italian government, moving to shore up its beleaguered economy, announced a massive austerity plan geared to slash its budget deficit by a whopping $75 billion.

Prices fluctuated on some stock markets as traders seemed unsure what to make of the crisis. On the London Stock Exchange, the broad-based Financial Times-Stock Exchange Index shot up about 100 points, then shed about 70 points before rising again to close up 105.6. Activity was calmer on Wall Street, where the Dow Jones industrial average closed down 3.51 points.

The German firmness on interest rates helped weaken the dollar, although the U.S. currency also lost some of the gains it had picked up Wednesday while serving as shelter from Europe’s storms. The mark continued to attract new investment; a dollar bought 1.485 marks in New York late Thursday, down from 1.514 Wednesday.

The pound was quoted at $1.78 in London late Thursday, and closed at nearly that value in New York. But in a sign of continuing volatility, it had fallen as low as $1.72 in London earlier in the day.

Thursday’s daylight hours seemed tame compared to the 12 hours ending at 6 a.m. in Europe. During that period, which culminated in an extraordinary six-hour meeting of European Community finance officials in Brussels that began shortly before midnight Wednesday, Spain devalued the peseta by 5% and Britain and Italy temporarily withdrew from the system that had linked the values of 11 EC currencies.

The day’s most significant development may have been what did not happen: The governing council of the Bundesbank, Germany’s central bank, met in Frankfurt but resisted the Continent-wide pressure, especially from Britain, to lower its interest rates.

David Roche, an economist with Morgan Stanley International in London, decried a “total failure” of EC nations to work together toward common economic goals.

“Blame in Europe is like custard: You can spread it all around,” he said.

Analysts predicted a new outbreak of chaos next week if French voters Sunday withhold their approval of the Maastricht Treaty on European union, which would establish a single EC currency in 1999. The death of the Maastricht Treaty could signal that Europe is not yet ready to live under a single economic roof.

Even a “yes” vote in France will not relieve all the pressure, said George Magnus of the London investment house S. G. Warburg. By the end of the year, he predicted, Germany will bring key rates down by about 1 percentage point from the current range of 8.25% to 9.25%, and more EC currencies will be devalued.

In France, the European monetary tumult dominated the final days of debate leading up to Sunday’s crucial referendum, adding even more uncertainty in an already confused campaign. Both defenders and opponents of the treaty used the monetary crisis to support their cause.

Former President Valery Giscard d’Estaing, a leading treaty advocate, contended that Europe should “accelerate the march to a European money” so that such crises could not happen again.

Philippe Seguin, the treaty’s leading mainstream opponent, countered: “Everything that is happening demonstrates the stupidity of a single currency.”

In Germany, the Bundesbank’s governing council met in its regular biweekly session and decided not to tamper with interest rates. The Bundesbank trimmed rates Monday for the first time in five years in return for Italy’s decision to devalue the lira by 7%.

The bank is holding rates high--about 6 percentage points higher than in the United States--to prevent the costly reunification with the former East Germany from producing economic overheating and an outbreak of inflation. The high rates have also attracted huge amounts of investment capital to Germany, boosting the German mark’s value against other European currencies.

In reducing rates Monday, the Bundesbank was widely criticized inside Germany for yielding to foreign pressure, and it was not about to let that happen twice in the same week.

German Finance Minister Theo Waigel, coming to the Bundesbank’s defense, challenged the common view that high rates are the cause of Europe’s monetary tumult.

“I think everyone should consider what the cause is in their own area of responsibility,” he said.

British officials in particular charged Bundesbank President Helmut Schlesinger with encouraging investors to sell British pounds in a newspaper interview--later disavowed by the Bundesbank--in which he predicted a wholesale realignment of European currency values.

The run on the pound reached unbearable limits Wednesday and, after two successive increases in interest rates, totaling 50%, failed to stem the tide, finally forced the government to abandon its effort to prop up the currency’s value. Late Wednesday, the government pulled back the second increase and Thursday, it canceled the first one, returning the base rate at the same 10% level where it started Wednesday.

Despite that, the pound, which had lost about 4% of its value against the mark Wednesday, gained some of that ground back.

Italy’s government, on the very day that it was shamefacedly forced to sever the lira’s links with other EC currencies, battled on political and economic fronts to repair the damage.

Italian officials said they would try to reforge the lira’s European links next Tuesday, after the French referendum on the Maastricht Treaty. Until then there will be no official rate of exchange of lira into foreign currencies, and individual banks and exchange houses were set free to trade at whatever the market would bear.

The value of the lira lay somewhere between 1,225 and 1,270 to the dollar Thursday, judging from press reports and traders in Italy and abroad. The lira had dropped from 1,097 to around 1,170 following Sunday’s devaluation.

As a gesture of solidarity with Europe and a message to referendum-bound France, the Italian Senate voted 176 to 16 to ratify the Maastricht Treaty. Prime Minister Giuliano Amato meanwhile began a long-scheduled round of consultations with German Chancellor Helmut Kohl.

To restore confidence in the lira, Amato emerged from an emergency Cabinet meeting with $75 billion worth of cuts in a 1993 budget whose deficit would otherwise be about $120 billion, more than 10% of Italy’s annual economic output.

“To this maneuver is entrusted the life of our government and the recovery of credibility in our currency,” said Amato afterward. “We Italians must restore faith in ourselves and restore the faith in our country and our currency of those who regard us from abroad.”

Major savings would result from restrictions on pay raises for public employees this year and next, from pension reform and from a reduction in health services for well-off Italians: no more early retirements, or pensions indexed to inflation; no more free medicines or thermal baths for relatively high-income taxpayers.

On the other side of the ledger, the 3-month old coalition government, which had already imposed more than $12 billion in new taxes, came up with more, aimed principally against companies, property owners, the self-employed and the conspicuously rich. High new luxury taxes are in store for owners of big cars, private planes, yachts and hunting reserves.

In Spain, which agreed to a 5% devaluation of the peseta in Thursday’s early morning hours, Prime Minister Felipe Gonzalez cut short a visit to Berlin and returned to Madrid, calling for calm in “a moment of great turbulence.”

“It seems that the market has accepted the new value of the peseta,” said a Bank of Spain spokesman.

Currency analysts, however, predicted a further devaluation would be necessary before Europe’s currency crisis ends.

In France, where public opinion polls are banned in the week before a national vote, it remained uncertain how Europe’s wildly fluctuating currencies have affected voters.

Because of the Bundesbank’s central role in the monetary crisis, the events have rekindled the continuing French debate about how to deal with its powerful German neighbor: to link Germany to a united European Community through the Maastricht Treaty or limit its influence on French internal affairs by breaking with the idea of a single currency.

Times staff writers William D. Montalbano in Rome and Rone Tempest in Paris contributed to this report.

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