The Monetary Dimension

Paul McIntyre,
Deputy Director, Europe, UK Treasury

I am very pleased as a British official, to be asked to speak at this conference about monetary union. The UK may or may not join the single currency, but we are certainly not opting out of the debate.

I want to set out the macro policy framework in which EMU will operate and then raise some issues on human resource strategies, the main focus for this conference.

Monetary and Exchange Rate Policy

The single currency will obviously mean a single monetary policy and a single exchange rate for the participating Member states. Although an obvious statement, it is worth pausing to think about its significance.

Let?s look at some history ? some Irish history, though I could have chosen other examples.

First, monetary policy. Since 1990 Irish and German short term interest rates have varied significantly. At present, German rates are about 3%, Irish rates are over 6%. But from the start of the monetary union, short term interest rates will be the same across the whole single currency area.

Second, exchange rates. It has been a similar story with the DM/punt exchange rate since 1990. Although there have been periods of stability, there have also been times when the rate has varied significantly. From the start of monetary union, rates will be irrevocably locked and, in legal terms, the national currencies of participants will simply be different ways of expressing the euro.

The bilateral rates among the participating currencies will be announced next Spring (1998), when the decision is taken on which Member States will join the single currency. (For the avoidance of doubt, I am offering no comment whatsoever today on which Member States might qualify, let alone on what their bilateral rates could be!)

Looking at this history shows how important it is that the participating economies are sufficiently convergent to make sure that they can live comfortably with a single monetary policy in Stage 3. The convergence question is also relevant to the structural issues I will come to at the end.

So how will monetary and exchange rate policies be decided in EMU?

As far as the objective is concerned, the Maastricht Treaty is clear. Price stability is to be the primary objective of both monetary and exchange rate policies.

Responsibility for delivering this objective is given to the European Central Bank. The Treaty is clear that, in exercising its powers, the ECB must not "seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body".

It is true that, elsewhere in the Treaty, the ECOFIN Council is given the power to formulate "general orientations" for the euro?s exchange rate policy, but these must be subject to the price stability objective. Similarly, the ECB has an obligation to support the general economic policies in the Community, but again this must be without prejudice to the price stability objective.

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