Entering monetary union is an attempt to change the course of history and is a brave policy, according to Bank of England committee member, Prof Charles Goodhart.
Speaking at the Jean Monnet memorial lecture in Dublin last night, Prof Goodhart, of the London School of Economics, said the lesson of history was that political moves towards unification or separation preceded and dominated the process of currency unification or separation.
But he asked how feasible it was to reverse the course of history and go for monetary unification in advance of political unification. "It is what was described in the series Yes Minister as a `brave policy'," he said.
However, Prof Goodhart was generally positive about the benefits of a monetary union. The great advantage of the euro zone, he said, was that exchange-rate volatility did not now impact on such a large proportion of trade.
The UK, however, was in a different boat. "One could certainly suggest that the UK has been more affected by asymmetric shocks (essentially exchange-rate shocks) in the last few years than has the wider euro zone."
But he asked what would happen if one state or another felt disadvantaged by the combination of federal monetary policy, or the setting of interest rates in Frankfurt, and constrained in national fiscal, tax or spending, policy.
Would the perceived benefits of being in the euro zone be enough to convince voters that their difficulties could not be fixed by a more nationalistic policy? This may not happen but, according to Prof Goodhart, it must remain a worry.
He was critical of the Stability and Growth Pact which was negotiated in Dublin in an attempt to rein in deficits when countries were in difficulty. Some of the constraints were "crudely designed". They gave no more latitude for current flexibility to nations with very low debt ratios than to countries with worryingly high ratios. They made only extremely restricted allowance for cyclical factors, he added.
As a result, he said, the prospect was for continuing tight tax-and-spending policies whatever stage of the economic cycle most countries were in; or of some relaxation of the rules, which could put the treaty at risk.
The fuss which surrounded the Italian decision to increase its budget deficit from 2 per cent to 2.4 per cent was remarkable, he said.
Prof Goodhart was positive about the general outlook for the ECB. "The combination of continuing strength in the US, recovery in Asia, the cut of euro interest rates to 2.5 per cent, reduction in the euro exchange rate and the steady growth in the monetary and credit aggregates has been just about perfect."
But he questioned how much room for manoeuvre would remain if the international horizon should cloud.
