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  "A single currency, or, even a firm and stable structure for several
  currencies, means an increase in the transparency and efficiency of
  markets, and in particular an end to unnecessary transaction costs for
  trade within the Community. This is particularly important for small
  businesses which cannot afford sophisticated hedging techniques or the
  purchase of currency on forward markets knowing that an adverse
  currency movement of  10 or 15% over a short period - by no means an
  unknown occurrence - can turn a respectable profit margin into an
  unsustainable loss. And of course the ordinary citizen's business or
  holiday needs for often very small sums of foreign currency can only
  be met at considerable percentage cost, and some personal
  Second, the greater the unification of money in any economic grouping,
  the less available is the temptation to pursue unsustainable short
  cuts towards economic success.  Experience has shown that the use of
  devaluation as a means of achieving economic regeneration has been
  tested to destruction over the last twenty years. A firm commitment to
  a stable structure of exchange rates removes once and for all the
  seductive but ultimately ruinous temptation to trade down in search of
  an apparent short-term competitive advantage. And it prevents a
  downward spiral of reactive devaluations, with trading partners
  manipulating currency values against each other.
  Third, greater monetary cohesion gives us through the European
  Community that much more influence over world financial markets. The
  yen and the dollar are both distinguished from the deutschmark,
  sterling and other European currencies not merely by the greater size
  and depths of their markets  but by the fact that they represent
  united economic areas.
  This is not simply a matter of prestige. The Community is more open to
  international trade than either the U.S. or Japan. It now
  accounts for one fifth of all world trade, and is the  world's biggest
  exporter. Exports represent twice as great a proportion of GNP for the
  Community as they do for the United States. We have to earn our living
  in world markets; and that means that we need to have as much
  influence over them as possible by speaking with one European voice.
  We currently face two major challenges to global financial stability.
  One is the need to find a consistent strategy towards the complex
  problem of third world debt.  The other is the continuing US payment
  deficit and its impact on the value of the dollar. It is neither right
  nor prudent for Europe to remain on the sidelines despite our
  collective economic power merely because of our continued financial
  disunity. The price we will pay is that our interests, and those of
  the open trading system, will be less effectively defended.
  Overall it is clear that currency stability has real advantages both
  for business and for individuals, and serious drawbacks only for
  governments which wish to manipulate and misuse the currency.
  There is no doubt that the European monetary system arrangements have
  provided its full members with greater price stability and broadly
  stable exchange rates. These have not been achieved by magic. There
  has been a real and increasing commitment on the part of participating
  Member States to undertake the necessary convergence of economic and
  monetary policy that is required to provide the discipline necessary
  for the exchange rate mechanism to work. Within the system, the
  central role of the deutschmark has led to convergence on a low
  inflation level. This has beeen a highly constructive development both
  for those countries involved and for the cohesion of the Community
  more generally. It is no coincidence that over the past 15 years
  intra- Community trade has grown twice as rapidly as trade with the
  rest of the world. The zone of monetary stability which the EMS has
  brought to the Community has complemented and encouraged our renewed
  efforts to complete the internal market in goods and services.
  I have for some years made clear my view that the next step should be
  sterling's full membership of the system. To join the system now would
  not merely lead to the medium-term benefits of price stability and
  easier trade which I have outlined. It would also be of direct and
  immediate benefit to the UK by providing the lowest cost means of
  reducing inflation from its current  7-8% to less than half that: to
  the  2-3% levels enjoyed by those Member States that are fully within
  the band.
  Sterling's entry will therefore require the expansion and
  strengthening of the EMS structure; and then a period during which a
  new system is seen by the markets to be operating effectively. It is
  only after such a period that it would be prudent to consider
  implementing any further institutional development.
  To be effective, however, an enlarged EMS does require two more modest
  developments. The first and most important is to develop a more formal
  structure of cooperation between central banks, to ensure that
  mutually consistent monetary targets are agreed and then implemented.
  this already happens to a considerable extent between participating
  central banks; to formalize these links while at the same time
  expanding the number of currencies within the EMS would be the
  clearest signal to the markets that the agreed currency parities
  within the EMS would be even more effectively maintained.
  Changes in national interest rates would on occasion be required to
  maintain these agreed parities. But the UK has had no shortage of
  interest rate changes without the advantages of exchange rate
  stability to be derived from EMS membership. And evidence from the
  interest rate movements of countries within the band suggest that
  greater monetary stability can in practice be enjoyed without any
  increase in interest rate instability.
  Moreover there is at present a considerable real interest rate
  differential between the UK and other EMS members due to the current
  resurgence of inflationary pressures in the British economy. This
  interest rate penalty, which at present imposes an additional cost on
  entreprises borrowing money in this country as compared with their
  competitors in say Germany, would decrease as sterling's full
  membership of the system was perceived to be permanent.
  To avoid outside shocks from destablizing the system unnecessarily
  there would be a need to strengthen the joint commitment of the EMS
  Member States to have recourse to the significant sums now available
  for intervention on the exchange market. By making clear that the
  coordinated weight of Member States' reserves could when necessary be
  used to stabilize the system, the need to use them would paradoxically
  be less. Here too the current agreements on the extent of joint
  intervention and the currencies to be used would need to be
  formalised, to ensure that a proper distinction was made between
  essentially temporary speculative pressures likely to be reversed over
  time, and those which reflect underlying divergence requiring
  correction through policy changes.
  In conclusion I wish to reinforce my message of optimism, and sound
  one small note of warning.
  These are exciting times in the financial markets. I believe that
  there has been an irreversible shift among governments, not just in
  the European Community but increasingly across the world, towards a
  realisation that use of market forces achieves both greater prosperity
  and a closer economic interdependence. The City of London with its
  global presence in the commodity and currency markets, its tradition
  of openness to innovation, and the continued importance of sterling as
  a trading currency has much to offer that process and even more to
  gain from it.
  Within the Community the step change towards a single European economy
  represented by the 1992 programme is bringing an increased demand from
  those most closely involved, the producers and traders, for a closer
  and more stable exchange rate structure. Without the participation of
  sterling it would be sadly incomplete - but the process will not be
  halted for that
  reason. And the future of the City of London as the undisputed
  financial centre of the European time zone requires that the UK must
  now play a full role in developing the currency stability of Europe as
  part of the move towards a more stable and open world trading system.
  If we do not there will be others that will seek to take our place."
  For further information please contact:
  Michael Berendt : 235 8562
  Elisabeth Kaiser : 235 2210

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