Some people here on the Continent who share this concern are inclined to argue that if a euro-participating country were to find itself in this situation - and given that it would have no macro-economic way out, for example, through exchange rate adjustment, or monetary relaxation, or fiscal stimulus beyond the limits of the Stability Pact - it would then have an overwhelming incentive to take the sort of supply-side measures which have proved so difficult to implement hitherto. I am not sure that you can necessarily rely upon that making life very much easier. But what I think this discussion points up, is the broader conclusion that if the euro is to go ahead in current conditions, as I assume that it will, then supply-side flexibility will become more crucially important that ever across the whole euro area. The Chancellor of the Exchequer announced last October that the United Kingdom would exercise its opt-out and not participate in the first wave of euro membership. That was a disappointment to some of our European partners. But it was a considerable relief to others, because UK participation from the outset would certainly have complicated the project - not least because of the substantial cyclical divergence between ourselves and the major countries on the Continent.
The nagging concern is whether this determined pursuit of macro-economic stability will be maintained - whether in fact the degree of macro-economic convergence that has been achieved is likely - in the terms of the Treaty - to be “sustainable”. A particular worry is that macro-economic stability, on its own, is not enough. It has not been enough to prevent the progressive emergence of very high, and very different, levels of unemployment in a number of the major Continental European economies. Unemployment has been for some considerable time, and it remains, much the most urgent and important economic issue confronting us in Europe. I do not suggest for a moment that the right answer would be to abandon macro-economic discipline and revert to old-fashioned demand management policies. In anything other than the very short term that would be likely to make matters worse. I share the broad consensus view that Europe’s unemployment problems originate essentially in rigidities on the supply-side of the economy. The point is that unless we are all more successful in bringing down this structural unemployment, through micro-economic policies designed to improve structural, supply-side flexibility, then some countries could find it difficult to continue to live with a common macro-economic discipline without significant tensions.