it would have an overwhelming incentive to take the sort of supply - side measures which have proved so difficult to implement hitherto. and the people in those countries would similarly have the incentive to accept structural change. i am not wholly persuaded that you can necessarily rely upon that making life very much easier. but what i think this discussion leads to the broader conclusion, given that the euro is to go ahead, that structural reform - in labour markets and welfare systems and in broadening and deepening the single market for goods and services, but also capital markets - in order to improve supply - side flexibility - becomes more crucially important than ever. the need for greater supply - side flexibility was the subject of much of the discussion at the informal meeting of european finance ministers and central bank governors in york last weekend, and i was greatly encouraged by the degree of consensus around the table on this point. the united kingdom of course will not participate in the first wave of monetary union. that decision, taken last october, was - as i noted earlier - a disappointment to some of our eu partners ; but it was a considerable relief to others because uk participation from the outset would certainly have complicated the project - not least because of the substantial cyclical divergence between ourselves and the major countries on the continent. but in making its announcement the british government made it clear that it is not opposed to euro membership as a matter of principle. when the time comes - and that will almost certainly not be during the lifetime of the present parliament - it will make its decision - and submit it to parliament, and the people in a referendum - on pragmatic, economic, grounds. in the meantime the united kingdom will prepare both for the introduction of the euro on the continent from next january and for our own eventual participation. [UNK] the fact is that monetary union will have a major effect on this country whether or not we are a part of it, and it is clearly in our national interest as well as the interest of the participating countries, that it should be successful. we benefit in macro - economic terms from a stable and prosperous europe just as continental europe benefits from a stable and prosperous united kingdom - and the same mutual interest, of course, applies between europe and its mediterranean neighbours. we can contribute to that success in at least three ways. most immediately the government has undertaken to use its current term as president of the european union council of ministers to promote an orderly decision - making process during the crucial next few months. not being

benefits from free trade and competition and act as a stimulus to growth and employment by allocating resources still more effectively based on comparative advantage, enabling savings to flow to where they can be most productively invested and production to be located where it can be most effectively carried on to satisfy consumer demand. the advent of the euro represents a massive new step in the same direction. the crucial and unique advantage of monetary union is the exchange rate certainty it will bring throughout the euro area - not just the reasonable de facto stability that can result from each eu member state individually pursuing disciplined macro - economic policies in parallel, and which has in practice been achieved within much of europe for quite long periods within the framework of the exchange rate mechanism - but actual, and in principle permanent, exchange rate certainty. there is no doubt that this is a very real advantage. 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 the benefits of free trade more generally. but there is no doubt that intra - european exchange rate certainty will - through the intensified competition resulting from greater transparency of prices and lower transaction costs, through broader and deeper capital markets, and through the associated improvement in economic resource allocation - substantially enhance the macro - economic benefits to be derived from the single market. whether or not it is essential, therefore, exchange rate certainty is very desirable from this perspective. the potential drawback of monetary union can also be simply stated, though it is 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 risks exists. they may result from cyclical divergence. they may arise from differences in fiscal positions even though these are to be constrained through the stability pact. or they 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 1970 ’ s or german reunification are classic examples. so 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