the past eighteen months will readily tell you! one can argue that exchange rate certainty is not an essential complement to the european single market - any more than exchange rate fixity is essential to achieving benefits from free trade more generally. but there is no doubt that intra - european exchange rate certainty would - through the increased competition resulting from greater transparency of prices and lower transactions costs, through broader and deeper capital markets, and through the associated improvement in economic resource allocation - enhance the benefits derived from the single market. whether or not it is essential, therefore, most people would, i think, agree that, other things equal, exchange rate certainty would be very desirable in this context. the potential disadvantage of monetary union can equally be simply stated, though it is perhaps more difficult to assess. essentially there is a risk that the single monetary policy - the single, one - size - fits - all, short - term interest rate - within the euro area, which is a necessary corollary of the single currency, will not in the event prove to be appropriate to the domestic needs of each of the euro - member countries. there is no doubt that such risk exists. it may result from cyclical divergence where for example would we be in the uk now, confronted as we are with relatively strong domestic demand growth, if we were obliged to have german - level interest rates? or where would germany and france be as they struggle to sustain domestic demand if they were constrained to have interest rates at the uk level? the risk may arise from differences in fiscal positions even though these are to be constrained through the stability pact. or it may result from economic shocks of some sort that have a bigger impact on some countries than on others. the rise in oil prices in the early 1970s or german reunification are classic examples. - 2so the risk of divergent monetary policy needs within the euro area is real. and the damage it could cause if serious tensions between member countries were to emerge is substantial, because alternative adjustment mechanisms, such as labour migration or fiscal redistribution, that exist within individual countries, and which help to alleviate the similar regional tensions that arise at the national level, are not well - developed at the pan - european level. the maastricht treaty, of course, recognised this risk, and the famous convergence criteria were designed precisely as a means of reducing the risk to manageable proportions by requiring that, before they join the euro club, countries should have achieved at least a minimum degree of macro - economic convergence

the same time some of these same people argue for a successful, strong and widely - used euro that will take its proper place alongside the dollar and the yen as an international - 4trading and portfolio currency, and in that context they positively welcome the active participation of london. in the end i do not think there is very much choice. in a world of increasingly integrated capital markets and liberalised capital movements it is inconceivable that the international use of the euro could be unnaturally constrained. there will be active euro markets in the major financial centres of the world, including in london, which will be ready to trade in the whole range of euro wholesale financial products from day one. and that will be in the interest of financial activity right across europe. like trade in goods, trade in financial services is a positive sum game, so that london ’ s success is not a threat to other european financial centres. as a major interface between europe and the rest of the world i have little doubt that euro - activity in london will mean more rather than less euro activity in other european financial centres like frankfurt, paris, milan, amsterdam or copenhagen. and i have little doubt either that what is good for those centres will be good too for the city. thirdly, and perhaps most fundamentally, the united kingdom, even while it does not participate in the euro, can contribute to its success by continuing to pursue macro - economic, both fiscal and monetary, discipline in parallel with the euro - area countries. the government is committed to this course as a matter of national economic self - interest - one of its very first acts in government for example was to hand operational independence for the conduct of monetary policy to the bank of england. but these same policies are calculated, too, to make us a more prosperous and active trading partner for europe as a whole, and to ensure that we do not have any avoidable disruptive effect on the policies or on the economy of the euro participants. more than this they are calculated to foster sustainable economic convergence as the necessary precursor to our eventual adherence to the euro club. and in the meantime the british government will continue to pursue, and to advocate in the councils of europe the supply - side flexibility that will be vital to its success. madam governor, i hope that i may have persuaded some of you at least that british reservations about monetary union are not just plain obstinacy! out of the first wave of the euro we may be, but we remain very much