Outlook: ERM poser
Thursday 04 February 1999
WHAT A SHAME it is when the cool reasoning of economics is disrupted by the dirty realism of politics. The new offensive by the European Commission to get the UK into the post-euro version of the European Exchange Rate Mechanism could be seen as pure mischief-making, given the realities of British politics.
The penalty the Conservatives paid in opinion polls for the 1992 ERM disaster means no British Government will ever be willing to take the pound back into a formal mechanism as a prelude to joining the single currency. Ministers and officials insist that it is not a requirement of the Maastricht Treaty, and that a period of reasonable exchange rate stability between the pound and the euro will be enough.
This makes perfect economic sense. All that matters is that the British economy should behave enough like the Continental economies that UK membership of the single currency will not cause undue strain. Gordon Brown's five tests, including the impact on jobs and investment and the degree of flexibility in the economy, are laughably vague and judgmental. But they nevertheless capture what really matters in the big euro decision in a way the formal Maastricht criteria never did.
However, if our friends in Brussels do decide to make a fuss about the formality of the pound's membership in the ERM, as opposed to the reality of its behaviour for the next couple of years, the only purpose can be to exert pressure on the UK in other ways. This could well turn out to be faster movement towards fiscal harmonisation than Britain might otherwise desire.
Although it carries its own difficulties, opinion inside Euroland has swung decisively in favour of faster integration on this front. Both Dominique Strauss-Kahn, the French finance minister, and Oskar Lafontaine, his German counterpart, have signalled their desire for it. First wave members will want new members to keep up.
Unfortunately, this too is pretty much a taboo area in British politics at present. Despite the incredibly successful launch of the new currency, a sensible policy debate about British membership of the euro looks as remote as ever.
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