If anyone doubted that the financial markets still consider the pound inextricably linked to sterling then the events of last Friday will have dispelled those doubts. The economy's dependence on that of the United Kingdom is not as great as it was but, quite clearly, it continues to be regarded as the relationship of most consequence. The upheaval was caused by a report which said that the British government is more positive about sterling joining the European Monetary Union. The report was neither confirmed nor denied by the British government. The markets were convinced that the broad thrust of the report was accurate and they are also convinced that sterling, when it joins the EMU, will do so at a much lower value then it is trading at currently. So with membership seeming more likely, dealers pushed down the value of sterling and the pound went down with it.
There is no question of sterling coming in at the foundation of EMU on January 1st, 1999. That would break one of the British government's principle election commitments. In addition, there are real concerns that British banks and retailers would not be ready in time. However, the attitude to EMU on the part of Mr Tony Blair and his closest colleagues seems to have shifted quietly from scepticism to enthusiasm.
Mr Blair cannot keep his intentions unknown for long. Before the year is out, his government must confirm formally that sterling will not be one of the foundation members. But as blunt a statement as that will greatly undermine Mr Blair's influence in the European Union - and Britain takes over the presidency on January 1st. No country can hope to be regarded as a major player in the EU if, unreservedly, it lines up against the only EU project of any real consequence. Far better to say that while sterling won't be there at the start, it is hoped that it will join pretty soon after, if the conditions are right.
The conditions are likely to be realistic but the joining date will be tricky. If it is to join at all, sterling must be a member by 2002 when notes and coins are converted into Euro currency. In addition, it is doubtful that Mr Blair will want to postpone entry until after the next election which must take place by 2002. In any event, he must deliver on a promise to put membership to a referendum. This could be done in tandem with the Euro elections in 1999. The timing needs to be right. If, because of circumstances at the time, membership promises significantly lower interest rates, a Yes result should be much easier to achieve.
Membership should mean lower interest rates on the Irish market too. In fact, the fundamentals exist for Irish interest rates to be reduced now but the Central Bank cannot oblige. While overall inflation is low, house price inflation is the opposite and it is felt that lower interest and mortgage rates would only put fuel on the fire. But new-found enthusiasm for EMU membership on the part of the British government is good news. The pound is going in on the first wave, come what may. But opinions would be very mixed if, when the pound climbed aboard, there was no foreseeable prospect of sterling coming in. An early statement by the British government to the effect that sterling may join up soon after will ease a lot of minds in the Irish export industries.