Who does not agree with the authors that the ERM countries, possibly excluding Germany, need much lower interest rates? It is true that some governments, notably the French, are nervous of 'cheap money'. Even so, central bank independence would be more likely to prop up interest rates than to drive them down.
We have seen a general drift to budget deficits because policy-makers had come to believe that controlling inflation was the only thing that mattered and that this was best achieved by means of central bank independence.
The consequences were predictable and predicted. Governments attempted to add back the demand that was being taken out by high interest-rate polices. For example, in the late Eighties the UK government was cutting taxes and raising interest rates when it should have been raising taxes and cutting interest rates.
Of course, a part of the problem is that people dislike paying for the public services they want or doing the saving which is needed to achieve a reasonable rate of economic growth. But at least a commitment to the joint management of monetary and budgetary policy would reduce the risk of a repetition of the 'hard money' policies from whose consequences we are now suffering.
M. R. WEALE
Faculty of Economics and Politics
University of Cambridge
23 AugustReuse content