Future of Monetary Arrangements in Europe

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THE INSTITIffE OF ECONOMIC AFFAIRS 2 Lord Nonh Street, London SWIP 3LB TelcphoncOI-7993745 FaxOI-7992137

lEA SPECIAL LECTURE

The Future of Monetary Arrangements in Europe ROBIN LEIGH-PEMBERTON The Governor of the Bank of England

wtth a Commentary Qy PATRICK MINFORD Edward Gonner Professor of Applied Economics, Universit;y of Liverpool, and Senior Research Fellow, lEA

Institute of Economic Affairs 1989

First published in September 1989 by THE INSTIlUfE OF ECONOMIC AFFAIRS 2 Lord North Street, Westminster, London SWIP 3LB

© The Institute of Economic Affairs 1989 Occasional Paper 82

All rights reserved ISSN ISBN

0073-909X

0-255 36223-4

Printed in Great Britain by GORON PRO ""PRINT

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LTD, LANCING, WEST SUSSEX

Set in Berthold Plantin 11 on 13 point

Contents Cento Veljanovski

FOREWORD

5

7

THE AUTHORS THE FTITURE OF MONETARY ARRANGEMENTS

Robin Leigh-Pemberton

9

EMU: The Delors Committee Report Delors's Three Stages .. Institutional Changes .. Optimum Currency Areas . . Economic and Cultural Integration the Key.. Transition to EMU - Alternative Strategies (a) An Activist Strategy (b) Exchange Rate Adjustment as a Response to Regional Problems? Cc) Evolutionary Strategies Fiscal Policy and EMU Gold Standard and US as Role Models? Conclusions on Transition Strategies to EMU .. ERM - The Issue ofUK Participation .. What Gains from ERM Membership? Improved Inflation Control? .. Risks and Strains of the ERM . . ERM - The Timing ofUK Entry. . Conclusions. .

9 10 11 11 12 14 14

IN EUROPE

15 16 17 18 19 21 21 22 23 24 25

CoMMENTARY: THE GoVERNOR BREAKS EURO-SILENCE

Patrick Min/ord

The Long Term: European Monetary Union? How Would the New EMS Work? [3]

27

27 29

'Nitpicking' the Governor's Logic Britain and the EMS: When Will the Time Be Ripe? Structural and Productivity Differences Conclusions. .

30 31 32 34

Back cover

SUMMARY

[4]

Foreword THIS Occasional Paper reproduces the second lEA Special Lecture delivered by the Governor of the Bank of England at the Queen Elizabeth 11 Conference Centre on 26 July 1989. In the Lecture the Governor gives his views on the nature and prospects of European monetary reform and integration. Given Britain's present reluctance to enter the European Monetary Union and the fear in some quarters that proposals for a central bank and a common currency will restrict competition and overly centralise decision-making, the Governor's views will be of great interest to all students of economic policy. As is now customary with Special Lectures we have invited Professor Patrick Minford of Liverpool University and a Senior Research Fellow at the lEA, to comment on the Governor's analysis and underlying assumptions. Professor Minford, one of the foremost monetary economists in the VI