The fact that we both have essentially the same objective – and are subject to the same limitations – does not, of course, mean that we can adopt the same policy stance – the same level of short-term interest rates, as some commentators have recently, and oversimplistically, suggested. We start from different positions, and our respective economies are subject to many different, as well as many of the same, influences. That was an important economic reason why the Government decided, rightly in my view, not to participate in the first wave of monetary union – despite the attraction, in the right circumstances, of nominal exchange rate certainty across the European continent. It was, I know, a matter of regret to many of our European partners; but there was also a sense of relief, because many of them recognised that our different economic situation would have complicated European monetary management had we joined from the outset, as it would have complicated monetary management in this country. In our case, the UK economy has grown at an average annual rate of around 3% now for the past six and a half years (to the third quarter of last year). That is well above any plausible estimate of the underlying rate of growth of capacity in the economy as a whole – which is typically estimated at some 2–2½%. So what we were in fact doing over this period was steadily reabsorbing the economic slack created by the recession of the early 1990s.
The position is complicated in the euro-zone by a reviving political debate about just how much of the unemployment reflects supply-side weaknesses requiring structural reforms, and how much it reflects inadequate overall demand. The outcome of that debate will be crucial to the future evolution of the euro-zone. But in the immediate situation there was no reason to suppose that continued growth of demand and output was inconsistent with effective price stability in the zone as a whole. So much for our different starting points. But over the past year, the world – and I mean the world – has changed quite dramatically for both of us in that we have both been affected by the international economic slowdown. This started, in fact, with the financial disturbances in Asia in the latter half of 1997, but even as late as the beginning of last summer it seemed as if it might have only limited impact on the overall world economy. The IMF, for example, was still then projecting 3–3¾% world growth in 1998 and 1999 respectively – which was certainly a setback compared with their forecast of over 4% just six months before – but it was hardly catastrophic. Since last summer it has become increasingly clear that things are likely to be significantly worse than that.