Bank 'will have to follow euro policy'

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The Independent Online
THE European Union's top monetary official will use his first speech to the City this week to warn that the Bank of England will be obliged to follow the monetary policy of the future European Central Bank - whether it likes it or not.

Yves-Thibault de Silguy is to deliver a lecture to the London International Financial Futures and Options Exchange (Liffe) on Thursday. Although the Finance Commissioner will not urge the UK to join the single currency immediately, he hopes to warn it of the pitfalls of delaying too long. Mr de Silguy argues that once the other EU countries enter into monetary union, the European Central Bank - the institution that will take over monetary policy for the "euro-zone" - will have a dominant influence in all 15 EU countries, including those that do not adopt the euro in the first wave next year.

In an interview with the Independent on Sunday, Mr de Silguy said this "will certainly affect monetary conditions in the UK without the UK being able to participate in decision making."

The idea is that financial markets will see Britain as a kind of "satellite" state of the countries in the euro-zone, because so much UK trade - around 60 per cent - is carried out in the EU. If the Bank of England wants to keep sterling stable to ensure smooth trade flows, it will be obliged to follow the interest-rate movements of the ECB.

Mr de Silguy dismissed the suggestion that the Bank might want to encourage divergencies in its currency to increase exports to the continent. "The UK is a well run economy that doesn't go in for competitive devaluations of its currency which would decrease the overall wealth of the country," he said.

The majority of EU countries, including France and Germany, are planning to adopt the euro on 1 January 1999. The British Government has said it will not join the single currency until after the next general election, which could be as late as May 2002. The Prime Minister, Tony Blair, has not ruled out holding a referendum on joining the single currency before then, although it seems most likely he will take the issue to the electorate after the election.

"I think attitudes (in Britain) will become more favourable very quickly once the euro becomes a reality. From that point on, the disadvantages of not being in the euro will quickly become apparent," Mr de Silguy said.

The Gaullist commissioner will also warn that non-EU companies wanting to invest in Europe will avoid the UK because it is not a member of the single currency.

In addition, British companies will be at a competitive disadvantage to their continental rivals because they will face an exchange rate when trading with the continent.

The EU heads of state are due to agree on 2 May which countries have met the Maastricht criteria on inflation, debt levels, budget deficit as a proportion of gross domestic product, and exchange rates - therefore enabling them to adopt the euro. Greece is the only country unlikely to be accepted. Denmark, Sweden and the UK have all decided not to join in the first round.

Around 70 per cent of Liffe's transactions are currently carried out in currencies that are likely to convert to the euro. "From 1 January 1999, most of the City's work will be done in euros, even if the UK is not in the single currency. The City will be the big trading place for the euro," Mr de Silguy said.