Letter: Out of step with EU
Friday 15 January 1999
Even on the quite inadequate criteria of inflation rates and interest rates we have not converged.
Of course, inflation rates are falling towards EU levels but they are still higher. And, of course, UK interest rates have fallen, but at 6 per cent they are still well above Euroland's and any precipitate fall towards 3 per cent would surely trigger inflation in the labour and housing markets.
But these criteria do not get to the heart of real cyclical convergence.
On any measure of capacity utilisation (whether it is, for example, unemployment for pressures in the labour market or a more general "output gap" measure) Britain shows no signs of moving into line with the core European economies.
Our business cycle is stubbornly transatlantic rather than continental.
There remain fundamental structural differences (for example, more divergent trade patterns and a greater sensitivity to changes in short-term interest rates) which - even if we were ever to get into "sync" with core Europe - would effectively torpedo any hopes of sustained cyclical convergence.
Head of Policy Unit
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