Ireland's involvement in the first wave of the European Union's single currency project remains a risk, albeit a justifiable one, without the United Kingdom, which remains this State's largest trading partner. It is therefore very useful to hear the views of Mr Eddie George, governor of the Bank of England, on the issues involved, notably his perspective on when the UK is likely to join. The key focus of his remarks in Dublin yesterday was that this is likely to be within the next five years, as has been widely expected. But he expressed some timely and pertinent warnings about difficulties and policy choices opening up along the way for EMU participants and non-participants alike. The most headline-catching of these was his observation that he would feel uncomfortable to be in Mr Maurice O'Connell's shoes as Ireland is steered towards EMU membership in coming months. Given the emergence of inflationary pressures in the Irish economy and the Central Bank's inability to use interest rate increases to curtail them, other means of addressing the problem would have to be found. He underlined the need for greater labour market flexibility and supply side deregulation throughout the EMU economies, including in Ireland, if this is to be done effectively. It will not be possible to devise policies which suit all regions and economies within the EMU design agreed in negotiations over the last number of years; nor will it be possible to achieve complete convergence of their economic cycles.
Such criticisms are well-established UK reservations about EMU, along with a pragmatic approach towards its practical success in delivering on its objectives. But Mr George's perspective was clearly geared to its success, which he believes to be well assured by the competence and experience of governors appointed to the European Central Bank. He said the UK, as a state preparing to join, would contribute to its success by encouraging the City of London to become fully involved in international trading of the euro, by itself pursuing macroeconomic fiscal discipline in parallel and by continuing to offer its model of supply-side flexibility in the EU's debate about international competitiveness.
A crucial issue for this State concerns sterling's convergence towards the euro and the rate at which it would be expected to join the common currency. Mr George said it is not possible for the UK simply to track the euro, since this could well be at variance with the Bank of England's primary anti-inflation objective. While he disputed any legal requirement that the UK should be a functioning member of the Exchange Rate Mechanism for two years before joining EMU, Mr George said he would strongly advise against doing so unless there was a longish period of exchange rate and macroeconomic stability, including converging interest rates between the British and euro-zone economies.
This is relatively good news for Irish policy-makers, who are most concerned with the damage a precipitate fall in sterling's value could have for Irish companies trading with the UK. It should be remembered that Ireland not only has a critical interest in this matter, but also a vote in the Ecofin and EuroX councils which would take the decisions on what rate sterling would join. Mr George's perspective gives grounds for hope that British policy towards the euro will be managed with due regard for the stability and common concern which would allow Ireland's interests to be protected.