One can argue that exchange rate certainty is not an essential complement to the European single market - any more than exchange rate fixity is essential to achieving benefits from free trade more generally. But there is no doubt that intra-European exchange rate certainty would - through the increased competition resulting from greater transparency of prices and lower transactions costs, through broader and deeper capital markets, and through the associated improvement in economic resource allocation - enhance the benefits derived from the single market. Whether or not it is essential, therefore, most people would, I think, agree that, other things equal, exchange rate certainty would be very desirable in this context. The potential disadvantage of monetary union can equally be simply stated, though it is perhaps more difficult to assess. Essentially there is a risk that the single monetary policy - the single, one-size-fits-all, short-term interest rate - within the euro area, which is a necessary corollary of the single currency, will not in the event prove to be appropriate to the domestic needs of each of the euro-member countries. There is no doubt that such risk exists. It may result from cyclical divergence where for example would we be in the UK now, confronted as we are with relatively strong domestic demand growth, if we were obliged to have German- level interest rates? Or where would Germany and France be as they struggle to sustain domestic demand if they were constrained to have interest rates at the UK level?
There is a view that the euro should in some sense ‘belong’ to the participating countries and to them alone. If that view were to prevail it would point in the direction of one form of bureaucratic regulation or another - no doubt with a nod in the direction of monetary policy considerations as justification - which would damage the euro at least as much as it would harm the financial markets of the City. At the same time some of these same people argue for a successful, strong and widely-used euro that will take its proper place alongside the dollar and the yen as an international BIS Review 23/1998  -4trading and portfolio currency, and in that context they positively welcome the active participation of London. In the end I do not think there is very much choice. In a world of increasingly integrated capital markets and liberalised capital movements it is inconceivable that the international use of the euro could be unnaturally constrained. There will be active euro markets in the major financial centres of the world, including in London, which will be ready to trade in the whole range of euro wholesale financial products from day one. And that will be in the interest of financial activity right across Europe. Like trade in goods, trade in financial services is a positive sum game, so that London’s success is not a threat to other European financial centres.