In or out, let's get a move on

While debate rages over EMU, time is running out

Acres of newspaper columns, months of TV airtime and forests of pamphlets and reports have been produced on what the UK should do about Economic and Monetary Union. The average ratio of light to heat in this eruption of analysis has been pretty low; to a large extent this is because many of those most keen to be heard are either firmly convinced that joining a single currency area would be disastrous or that not joining would be a calamity. Often those judgements have little to do with the economics of the issue; usually the argument comes down to who can make the most noise - people shouting about "loss of sovereignty" or people shouting about "being left behind".

Over the last four months, I have been a member of a panel of economists and business people (several of whom have extensive public sector experience) who have met regularly to focus on a rather different aspect of EMU than the one about which most noise is heard. The panel, set up under the auspices of the Centre for Economic Policy Research and chaired by Rupert Pennant- Rea was asked to consider what the practical economic policy issues were of following various strategies towards the single currency. The issue was not whether the UK should be in or out. Had that been the question, writing a report (a task which fell to me) to which all members of the panel could put their names, would have been impossible. But, in fact, there was a surprising amount of agreement on what the policy implications of foll- owing different strategies were.

Our starting point was the observation that whatever course the Government eventually takes, there will be big changes in the economic environment, and these changes require policy responses. Some were widely recognised: for example, a decision to join EMU would require that the Bank of England should have more than operational independence over monetary policy. But other implications of joining have not been analysed so carefully. For instance, being in a monetary union would be less problematic for Britain if its sensitivity to interest rates were more like that of other EMU members. Could that be engineered and, if so, how? Any such policies would take time to implement and bear fruit, which therefore affects dates when it would be sensible to join EMU.

Our analysis was based on the view that the UK Government has four possible strategies for EMU:

Join at the start;

Decide to join at a later stage;

Wait and see. The pragmatic agnostic's position: if EMU works, then join up at some unspecified date;

Decide in principle not to join.

Joining at the start would require:

A fully independent central bank by the end of 1998. The Government would therefore have to attach high priority to drafting and passing a new Bank of England Act that was, in important respects, different from that outlined by Gordon Brown, when he gave the Bank operational independence.

A significant tightening in macro-economic policy before the UK was subject to an interest rate that would probably be much lower than it needs for its current cyclical state. Interest rates in EMU's first-wave candidates are now 3 per cent below UK rates, and the gap might be wider in a year's time.

A lower exchange rate.

Enhancing automatic fiscal stabilisers, to compensate for the loss of autonomy over monetary policy.

Reducing the tax incentive to use debt. This will help make the transmission mechanism of UK monetary policy more like that in other EMU candidates.

A decision to delay entry by, say, three or four years would ease or eliminate the practical problems of trying to achieve these things in time for the start of EMU. It will not be imperative to make the Bank of England fully independent by the end of 1998, though legislation should not be delayed for long. It will also be desirable to bring in legislative measures to enhance the fiscal stabilisers; they will then have a chance to start working.

But the bigger advantages of delay relate to conjunctural and exchange rate concerns. By 2001 or 2002 the EMU interest rate may well be broadly what the UK economy needs in the cyclical circumstances it will then find itself.

A wait and see strategy has the obvious advantage that some of the uncertainty about EMU - on the operation of monetary policy, on the demand for, and value of, the euro, on the strains generated by a single short-term interest rate for all the "ins" - will be reduced. But in order to keep open the option of joining EMU some way down the road it would still be desirable to reduce the fiscal deficit and remove tax incentives to use debt. It would also be sensible to draft the amendments to the Bank of England Act in a way which allowed it to operate as part of the European System of Central Banks should the UK join EMU.

If the UK was to stay out of a monetary union how the value of sterling fluctuated against the euro would be of great significance. The sterling- euro exchange rate would be more important for UK business than any bilateral rate now is. Sharp fluctuations would be more damaging than a similar fluctuation in a bilateral rate today. And because countries inside the single currency area could not independently do much to alter competitiveness against the UK they are likely to be more sensitive to the exchange rate implications of UK policy.

The surest way for the UK to minimise discrimination against British- based firms is to participate actively in the development of the single market. If the UK stays out of EMU, this will be even more important - and perhaps more difficult too. Much will depend on attitude. If the UK is seen as a constructive agnostic on EMU, it will be listened to on subjects such as competition policy. If it comes across as a whinging outsider, it won't.

Our key message is that time lags are crucial. It takes time to change tax rates, or to change the Bank of England's status, or to increase the role of fiscal stabilisers, or to move into fiscal surplus. It takes even longer for the impact of changes in taxes or regulations to feed through. Without a clear picture of the time lags it is hard to set priorities and make decisions on entry.

David Miles is Professor of Finance at Imperial College, University of London, and an Economic Consultant at Merrill Lynch. Hamish McRae is away.

'The Ostrich and The EMU: Policy Choices Facing the UK' is pub-lished by CEPR with support from the Esmee Fairbairn Charitable Trust. Tel: 0171 878 2900; Fax: 0171 878 2999.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

Ashdown Group: Training Programme Manager - City, London

£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

Day In a Page

Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

The secret CIA Starbucks

The coffee shop is deep inside the agency's forested Virginia compound
Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

How the Establishment closed ranks over fallout from Nessie 'sighting'

The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
One million Britons using food banks, according to Trussell Trust

One million Britons using food banks

Huge surge in number of families dependent on emergency food aid
Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

2,500 years of history in 3,000 amazing objects

Excavation at Italian cafe to fix rising damp unearths trove
The Hubble Space Telescope's amazing journey, 25 years on

The Hubble Space Telescope's amazing journey 25 years on

The space telescope was seen as a costly flop on its first release
Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

Did Lord Ashcroft quit the House of Lords to become a non-dom?

A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
Apple's ethnic emojis are being used to make racist comments on social media

Ethnic emojis used in racist comments

They were intended to promote harmony, but have achieved the opposite
Sir Kenneth Branagh interview: 'My bones are in the theatre'

Sir Kenneth Branagh: 'My bones are in the theatre'

The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
The sloth is now the face (and furry body) of three big advertising campaigns

The sloth is the face of three ad campaigns

Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
How to run a restaurant: As two newbies discovered, there's more to it than good food

How to run a restaurant

As two newbies discovered, there's more to it than good food
Record Store Day: Remembering an era when buying and selling discs were labours of love

Record Store Day: The vinyl countdown

For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

Mary J Blige and Will.i.am to give free concert

The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
10 best tote bags

Accessorise with a stylish shopper this spring: 10 best tote bags

We find carriers with room for all your essentials (and a bit more)
Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

Paul Scholes column

I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
Jessica Ennis-Hill: 'I just want to give it my best shot'

Jessica Ennis-Hill: 'I just want to give it my best shot'

The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...