Opt-out from EMU `will harm Britain'

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In a clear warning to the Government, Eddie George, the Governor of the Bank of England, warned that opting out of European monetary union would not be a "soft option" and could be damaging.

Countries which decided not to take part would have to keep the same tight rein on their economies as EMU members, "otherwise they would be likely to suffer in terms of financial and physical investment," Mr George said in a speech in Luxembourg last night. Non-EMU members could also find that large movements of capital across their borders caused major economic disruptions.

Mr George does not believe that the start of monetary union (the locking of exchange rates between participating states) need be followed by the introduction of a single European currency in the form of notes and coins. u"It would be possible for national currencies to continue to be used alongside or instead of the European Currency Unit for a generation - even, in principle, indefinitely." He did not directly address the issue of whether Britain should join the EMU but went significantly further than in previous speeches in supporting the project in principle.

He warned of the need for caution and stressed it was vital that countries involved met the guidelines for reducing differences between their economic policies and performance as laid down in the Maastricht Treaty.

Echoing arguments of the Chancellor of the Exchequer, Kenneth Clarke, Mr George said Europe could only benefit from the sustained monetary and exchange rate stability of monetary union, which would encourage investment: "I certainly would not question the view that sustained monetary and exchange rate stability within the European Union is wholly desirable and would substantially increase the benefits of the single market by improving the efficiency of resource allocation within Europe.".

Although countries could work to achieve such stability without EMU, the solidarity of a Europe-wide monetary system would be more successful, he said. "While European monetary stability can in principle be achieved without monetary union, and while this could deliver de facto relative exchange rate stability, this would not provide the business community with certainty about intra-European exchange rates over the medium and long term. That would be a unique advantage of monetary union.

"The economic argument for monetary union is that it would deliver greater union-wide stability in practice and, importantly, that it would carry greater conviction with investors that intra-European stability would be maintained into the medium and longer term."

Mr George warned that if monetary union was to achieve such benefits, member states should not "fudge" the necessity of ensuring real convergence in their economies.

While stressing that he was not calling for changes in the convergence rules set out in the Maastricht treaty, the Governor warned about failure to address the different levels of unemployment in member states. If this were not done there could be a real possibility of migration within the EU.

The costs of ignoring the need for true convergence could be substantial, Mr George said, in a repetition of his recent plea for economic realism to inform the debate. He concluded that the important point was to continue to work towards a single currency with an open mind.