National Economic Development Office
Our ref: 89/48 6 June 1989
TO JOIN OR NOT TO JOIN?
THE OBSTACLES TO EUROPEAN MONETARY UNION
Walter Eltis, Director General of the National Economic Development Office, in a paper based on a seminar he gave in the Economics and Statistics Department of the OECD in Paris on 25 May, questions whether the microeconomic benefits would outweigh the potential macroeconomic disadvantages of joining the European Monetary Union.
Referring to the United Kingdom's continuing postponement of membership of the Exchange Rate Mechanism (ERM), Mr Eltis said:
"Some have found this postponement of United Kingdom membership puzzling, because it is widely believed that the countries that joined the Mechanism when it was first set up in March 1979 are now deriving considerable benefits. Italian inflation exceeded West German inflation by 10 percentage points in 1979, while French inflation was 6 1/2 per cent faster. Today Italian inflation exceeds German inflation by only 3 1/2 percentage points while inflation in France is only 1 1/2 per cent more rapid than German inflation. Ten years' membership of the ERM has therefore reduced Italian inflation by 6 1/2 and French inflation by 5 percentage points relative to the West German rate. In terms of inflation control, these are very considerable benefits.
"But the advocates of immediate United Kingdom membership do not always recall that it has taken ten years for France and Italy to achieve this degree of inflation convergence during which the franc and the lira have been devalued many times against the D-Mark. In fact since March 1979, despite membership of the ERM the lira has fallen 40 per cent and the franc 33 per cent relative to the D-Mark, while sterling without the benefits of membership has fallen no more
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