potential benefit of joining - as a result of greater transparency of costs and prices and lower transaction costs - leading to greater competition and more efficient economic resource allocation is well understood. exchange rate certainty within europe - even though only within europe, and even though it is nominal exchange rate certainty rather than real exchange rate certainty, which is what matters in terms of competitiveness - would potentially enhance the benefits to be derived from the european single market. the euro ’ s second very powerful advantage is the possibility it opens up for much broader and more liquid financial markets. it will mean a progressive narrowing of spreads between borrowers and lenders, which is good news for the users of those markets - and that will be good news too for financial intermediaries as a group, because it will lead to higher volumes of financial activity. not every individual intermediary will benefit, of course, in the more competitive environment, but those who survive will thrive! the city of london is already making an important contribution to this process of euro financial market integration. it is in fact the greatest contribution that the uk can make to the success of the euro while we remain outside. ( it runs alongside the conceptually distinct, but closely related, pressure for broader international integration of financial markets, currently reflected in a spate of initiatives to unify trading platforms, and both clearing mechanisms and settlement systems, in which london, of course, is also very much involved. ) these then - nominal exchange rate certainty throughout the eurozone and integrated euro financial markets - are potentially powerful economic arguments in favour of uk membership. what then are the risks - the possible arguments against our joining the euro? essentially the potential downside can be summed up as the risk that the single monetary policy - the “ one - size - fits - all ” short term interest rate within the eurozone, which is the inevitable consequence of a single currency - will not in the event prove to be appropriate to the domestic monetary policy needs of all the participating countries. countries may have divergent cyclical positions. they may face divergent fiscal positions, which would affect their appropriate fiscal / monetary policy mix in different directions - though this should be contained by the growth and stability pact. or their domestic policy needs may diverge as a result of economic shocks of some sort - a classic, but unique, example was german re - unification, but the more recent global economic disturbance was perhaps another example. the risks of divergent monetary policy needs within a monetary union are certainly real

. they were recognised in the maastricht treaty, which established the famous “ convergence criteria ” precisely in order to try to limit the risks before the euro - project went ahead. they are essentially similar to the risks of sectoral or regional divergence within a national currency area - which we in the uk certainly know something about - it is in fact a major monetary policy headache for us at the present time. but in the case of the eurozone the risks are of divergent monetary policy needs between the different member countries - they apply at the national level. and if they materialised to any very significant extent, the resulting tensions could be serious, because alternative mechanisms - such as labour migration or fiscal redistribution through a central budget - which help to mitigate sectoral or regional disparities in the national context - are less developed at the eurozone level. some commentators point to the present inflationary pressures in ireland as an example of the problems that could arise where the single monetary policy is easier than the national situation might require - though i am not sure how far one can sensibly generalise from the irish experience. it is equally possible to envisage circumstances in which the single monetary policy is too restrictive for some countries. the fact that the uk did not join in the first wave of emu was a disappointment to some people, including to some of our european partners - but it was also a considerable relief to them - we would certainly have complicated the task of the ecb in setting its single monetary policy. and from our own perspective, if we had joined emu from the start - and had eurozone interest rates over the past eighteen months or so, it is very difficult to envisage how we would have avoided an inflationary boom in the uk. it is true that, to the extent that the present imbalance within our economy reflects sterling ’ s appreciation against the euro, we would have been protected against that. but, with accelerating inflation in the economy as a whole, the effect would have been tantamount to real exchange rate appreciation, which would in any event have damaged their competitive position and so provided at best only short - term relief even to them. and it would not in that case be possible to reverse that effect through exchange rate adjustment. the fact is that there are no easy answers or ideal solutions to the one - size - fits - all problem at the eurozone level, without substantial - and sustainable convergence between our economies, although coping with such