or even to the united kingdom itself. the question is whether there is sufficient flexibility within the proposed currency union to cope with asymmetric shocks. we know that, in the united states, there is considerable fiscal flexibility, some through automatic stabilisers, like federally - funded welfare benefits, and some through direct transfer payments from prosperous to less prosperous states. we also know that there is considerable labour mobility in the united states, and that wages vary widely from region to region. in europe, the central eu budget is very small, less than 1. 5 per cent of european gdp, and there is no strong current of opinion in favour of expanding it significantly. it is also the case that labour mobility is low, for linguistic and cultural reasons, which cannot easily be overcome by government fiat. now i would certainly not argue that an emu could not be attempted without a huge central eu budget, or without teaching everyone commercial german. but we need to make sure that labour markets are as prepared as they can be for the future, a future in which there will be no possibility of the use of the exchange rate to cope with changes in competitiveness, from country to country, whether driven by supply - side shocks or by differential rates of productivity growth. our concern is that, unless emu is accompanied by measures to free up europe ’ s labour markets, existing high rates of unemployment in disfavoured regions will be ossified, with unpredictable and possibly unpleasant social consequences in the long term. looking at europe ’ s regional economies, it is striking that relativities between them have remained so stubbornly large for so long, even within individual member states. indeed only in the uk have there been some recent signs that relative unemployment rates, from prosperous to less prosperous regions, have begun to converge. that appears to be related in changes in relative wages which have come about as a result of the dismantling of centralised pay bargaining, and of other labour market restrictions, in the 1980s. elsewhere in europe those changes have not been made ; without them we would have to enter a reserve on the preparedness of some european economies for the rigours of a single currency. that is another point which, i am sure, any british government will wish to take into account in making its final decision. and we would feel more comfortable about the likely success of emu as a whole - and i emphasise that the success of emu is strongly in the british national interest, whether we are

momentous enterprise, with huge consequences for european economies. the act of irrevocably fixing exchange rates, between economies which have in many cases been managed separately for centuries, is not a step to be undertaken lightly. it is an exciting venture, almost too exciting for some, perhaps. those who have operated for decades with a regime of low inflation, interest rates set by a strong independent central bank, and a strong and appreciating currency, may rightly think they have little to fear from the disciplines implied by emu. others will find emu more bracing, particularly those whose inflation record has been poor, whose currency has undergone successive devaluations, and whose fiscal position is less than robust. for those countries, the emu mission is potentially dangerous. joining emu would for them be to embark on a stiff mountain ascent, in weather which might be colder and less forgiving than one is used to. in those circumstances, the boy scout ensures that he is well prepared. he equips himself with waterproofs in the event of rain, with thick pullovers for the cold, with stout boots and, probably, a swiss army knife in case it should prove necessary, at some point on the journey, to extract a stone from a horse ’ s hoof. he would also, i think, wish to ensure that he was fit, and had undertaken some strenuous rambles in the foothills before making an assault on the mountain range. at this point you may be tired of hearing about boy scouts, and be ready to accuse me of the typical british trick of hiding behind down - home metaphors, and reducing topics of high seriousness to wry jokes. so let me be entirely clear about what i mean. we fully appreciate the great potential advantages of emu for europe ’ s economies. the chancellor of the exchequer, kenneth clarke, described them in the house of commons on wednesday of last week. as he said then " if emu can be made to work it would eradicate exchange rate movements which can disrupt trade and have disrupted trade in our recent history. emu would also reduce transaction costs, making it easier for smaller businesses to enter into and compete in the european market. the members of a strong euro zone could also expect to enjoy lower interest rates... countries with a history of devaluation or bursts of inflation pay a lasting premium in terms of higher interest rates, as we in britain know only too well! " and in