Outlook: Convergence

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STILL IN the realm of economic theory, here's a tricky one. Take three major countries - Italy, Spain and Ireland - and dramatically reduce their interest rates at a time when their economies are doing quite nicely, thanks very much. Then irreversibly fix their exchange rates. And then finally try and set a single interest rate for not only these three, but for - just to pick a number at random - eight other economies too. Bear in mind that this single interest rate must not jeopardise price stability. Also remember that you do not want to tip your 11 economies into recession.

Yes indeed, this is the conundrum faced by Wim Duisenberg, president of the European Central Bank, when European Monetary Union finally kicks off 64 days from now.

In the normal run of things, Mr Duisenberg would be best advised to do nothing for the first year or so in office but let the massive easing seen over the last few weeks in the European boom economies work its way through the system and assess how it responds. These are uncharted waters. Mr Duisenberg is entering them with neither map nor compass.

Time may be what Mr Duisenberg needs, but time is certainly not what he's going to get. We live in fragile economic times, and the pressure for Mr Duisenberg to act - both from the markets, which expect the ECB to cut rates in early 1999 and from the politicians - is already intense.

If Mr Duisenberg is to avoid going down in history as either the man who led Europe into recession or the man who sparked an inflationary boom, he is going to need a great deal of economic intuition and a healthy dose of luck. Experience to date suggests economic intuition is woefully lacking. Let's just hope Lady Luck plays ball.