Economists argue in the report that the lock-in rates between participating countries should be set at their central parity rate within the exchange rate mechanism. This is a controversial proposal, opposed by other European experts, and rather different from the two alternatives touted so far by European officials.
The mechanism for setting entry rates for economic and monetary union in January 1999 will have to come before an informal Ecofin meeting of European finance ministers and central bankers before the participating members are announced in the spring of next year. The first chance for a full discussion will be at the informal Ecofin on 4 April.
The main proposals now under consideration are to fix the entry rates at whatever the market rates happen to be on 1 January 1999, or alternatively to use an average of each country's market position over a period of months or years. The second option is widely referred to as the Lamfalussy rule, after the president of the European Monetary Institute, who first aired the idea.
The CEPR report, entitled EMU: Getting the endgame right, says it is a mistake to rely on market forces to establish the relative positions of currencies: "Leaving the last day's exchange rate indeterminate implies that markets have no anchor to base their expectations on during the interim period. This would destabilise exchange markets in a period when it is least desirable."
Instead, the report says, the markets should be given guidance in the form of a commitment by central banks that conversion rates will be at the current central parities of the exchange rate mechanism. The authors maintain that if the commitment is credible, markets will converge on those central rates.
But some City analysts are not so sure that the convergence on the central parities would actually take place. Graham Bishop of Salomon Brothers said: "There's a lot to be said for keeping the markets guessing. It is a mistake to give the markets something to aim at."