, it might be valuable for you to know the points on which particular emphasis was — and is still being — placed in the german debate. perhaps there will be some aspects which might provide a stimulating talking point for your own discussion. ii let me start with a simple, but fundamental, analysis : what does monetary union mean? what kind of environment does it create? it seems to me that it possesses three essential characteristics : firstly : membership of monetary union implies relinquishing monetary sovereignty. monetary policy becomes european. naturally enough, that concerns the level of the official interest rates. but it goes further than that. european monetary policy includes the framework in which monetary policy is conducted, embracing not only its structure and the way in which the central banking system perceives its own role, but also the strategy and instruments used, as well as much else besides. secondly : the monetary union is designed to last. entry into it is a road on which there is no turning back. in monetary union, a “ trial marriage ” is no longer possible. reversing that decision would entail incalculable economic and political costs. no one ought to place any faith in that being a realistic option. and thirdly : the euro area is unlike every other currency area, which is defined — at least usually — by the area of a single sovereign nation state. there is a single monetary policy for the euro area. however, the other areas of policy, such as budget, tax and social policies, are still largely decentralised. fiscal policy, in particular, must abide by the rules set down in the maastricht treaty and in the supplementary stability and growth pact. these three characteristics appear straightforward and self - evident. but they have important implications : one key implication is that the euro area requires lasting economic convergence — convergence in the sense that each single country must be able to keep up with the others on a permanent basis, without recourse to national monetary policy or changes in the exchange rate. that necessity of lasting convergence has to be seen against the backdrop of unrestricted capital movements and supranational monetary policy. a traditional nation state with its own currency has several options available for fostering convergence within its own currency area. there are largely uniform economic and taxation policies to prevent excessive deviations in politically - induced conditions for investment. there is a national budgetary policy which can give financial support to regions which are lagging behind the general trend. and there is a largely

similar and similarly funded system of welfare. these are all things which the euro area does not have at a supranational level — or, at least, not to anything like the same extent. there are some — mainly on the continent — who regret this because it means that economic convergence cannot be created or, at least, actively promoted by a centralised policy. others — and i suspect that the overwhelming majority of the british people belong to this camp — believe this to be a good thing. europe should not be a dominant centralised entity, nor should it have an egalitarian public - sector system of adjustment. it should be decentralised, organised on the principles of subsidiarity and geared to competition. your prime minister put this in a nutshell : “ integrate where necessary. decentralise where possible. ” i would add that i have a great deal of sympathy for that position. however, one also has to see the other side of the coin. one problem remains : how can a politically decentralised monetary union safeguard the necessary lasting convergence of all its member states? ultimately, there is only one way of doing this. safeguarding lasting convergence in a politically decentralised monetary union must rest on two pillars : firstly, on each country ’ s own sustained competitiveness and on each country ’ s own efforts ; and, secondly, on a fundamental willingness to accept certain binding rules and abide by them on a permanent basis. that is the only way in which a monetary union with a decentralised political structure can succeed — not only economically, but also politically : in other words, without excessive conflict among the participating countries. iii the competitiveness of each single country is obviously initially one economic condition for a kind of optimum currency area. basically, an optimum currency area means that, in the longer term, there is no need for adjustment of the nominal exchange rate because other adjustment mechanisms are effective, say, as a result of internal flexibility or a high degree of labour mobility. that is clear in theory. in practice, there is a fundamental problem : how can the ability to “ keep up ” be assessed? and how is it possible to safeguard that ability and the willingness to utilise it on a lasting basis? now, in some way or another, the track record and the basic situation in the countries concerned have to be taken into account. the maastricht treaty does that and stipulates convergence criteria for that purpose. these