UK: In my opinion - Institute of Management companion and Bank of England governor Eddie George.

UK: In my opinion - Institute of Management companion and Bank of England governor Eddie George. - In my opinion - Institute of Management companion and Bank of England governor Eddie George says, whatever happens, managers will be affected by the euro.

Last Updated: 31 Aug 2010

In my opinion - Institute of Management companion and Bank of England governor Eddie George says, whatever happens, managers will be affected by the euro.

The wait for the euro is over, and we have now entered a fascinating period as we see just how the new currency evolves. It is an exciting prospect, because such a merging of national currencies is a truly historic step. The United Kingdom is not among the 11 countries directly involved but, in one sense, we are already 'managing with the euro'. The pros and cons of economic and monetary union (EMU) have been extensively debated in this country and the issues surrounding it are now better understood.

The crucial and unique economic advantage is that there will be nominal exchange rate certainty within the euro area for the indefinite future. This will bring very real material benefits, as any UK exporter who has suffered from the exaggerated strength of sterling over the past two years will confirm. These benefits can arise from increased competition, greater transparency of prices and lower transactions costs, broader and more liquid financial markets, and a consequent improvement in economic resource allocation.

But the main risk is that the single monetary policy - the single, one-size-fits-all, short-term interest rate within the euro area that is a necessary corollary of the single currency - will prove inappropriate to the domestic needs of each of the euro-member countries. This might happen if there is cyclical divergence within the euro area, as some participating countries need to stimulate domestic demand while others already operate close to capacity. It might arise from differences in fiscal positions, although these are to be addressed by the Stability and Growth Pact. Or it may result from economic shocks, such as the rise in oil prices in the early 1970s or German reunification, which can have a bigger impact on some countries than on others.

The convergence criteria of the Maastricht Treaty were designed to reduce this risk to manageable proportions. Before joining the euro club, countries must achieve a minimum degree of macro-economic convergence. In this way, they demonstrate their commitment to macro-economic discipline through fiscal consolidation and a monetary policy designed to maintain effective internal domestic price stability, not simply as an end in itself at the expense of economic growth or employment but as a necessary means to an end - that of sustainable growth.

All EU countries have made great progress towards macro-economic stability over the past few years. If that progress continues, other things being equal, there will be a further convergence not only within the euro area but also with outsiders such as the UK. Other things, of course, are not always equal. The risk of divergent domestic policy needs, or of potential tensions within the single currency area, has not simply disappeared with the advent of the euro. Cyclical differences remain, despite the elimination of interest rate differentials between the 11 euro countries.

Some may have to maintain a tighter fiscal policy than would otherwise be necessary, to offset the easing of monetary policy after the move to a single interest rate. Several have entered EMU with very high ratios of public debt to GDP. Virtually all face the prospective burden on their public finances of ageing populations. Rigorous fiscal discipline throughout the euro area will therefore be necessary well into the future. There is still potential for external shocks which will affect different member countries in different ways, as events over the last year have shown, first in Asia, then Russia and, most recently, in Brazil.

Of course the introduction of the euro affects the UK on the 'outside' and it is in our national interest to do all we can to help ensure that it is successful. As an 'out', or a 'pre-in', the UK can contribute two things in particular.

First, we can continue to pursue monetary and fiscal macro-economic discipline alongside the euro-area countries. The British Government is commited to that course as a matter of national economic self-interest but the same philosophy under-lies the Maastricht Treaty. This should reassure businesses that the situation in the UK will remain stable.

Yet, we must also recognise that the UK and the euro area are at different stages of the economic cycle. Comparisons between short-term interest rates in the UK and in the euro area are not helpful.

Second, the UK can contribute directly to the development of the euro through the City of London's financial markets. The City is particularly good at providing liquid, transparent, competitive and innovative, but well-regulated financial markets. I was encouraged to see how smoothly the conversion weekend went at the beginning of January in the European financial centres and also how the City is getting on with building up euro-denominated business.

It is not just the City that is affected by the euro. UK business managers need to think strategically about how they should prepare their businesses as the role of the euro grows. First, they must think about the role of the euro while the UK remains outside EMU. In effect, the euro is another foreign currency, albeit one used by some of our major trading and business partners. Looking further ahead, they should think about what they would have to do if the UK decided to adopt the euro in the future. This does not involve taking a view on the politics of EMU, important though that is. Rather, it is a matter of sensible management planning.

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