The decision on who will participate in the third stage of economic and monetary union will be made early next May, in accordance with the procedures laid down in Article 109j of the Maastricht Treaty. The Council of Ministers, ECOFIN, will assess whether each member state fulfils the necessary conditions for the adoption of a single currency on the basis of convergence reports from the European Commission and the European Monetary Institute. ECOFIN will recommend its findings to the Council meeting in the composition of the Heads of State or Government, who will, after receiving the opinion of the European Parliament, confirm which member states fulfil the conditions.
The United Kingdom has an opt-out from the provisions of EMU, under a Protocol attached to the Maastricht Treaty. Ireland decided not to seek such opt-out. Under the terms of the Protocol, the United Kingdom has notified the Council of Ministers that it does not intend to move to the third stage of EMU on 1 January 1999. Consequently, the United Kingdom is under no obligation to move to the third stage. The United Kingdom may, however, reverse its notification at any time after the beginning of that stage.
The British Chancellor of the Exchequer in his statement to the House of Commons on 27 October last made it clear that, barring some unforeseen change in economic circumstances, the United Kingdom will not participate in EMU during the lifetime of the present Westminster Parliament. However, the Chancellor stated that, if a single currency is successful, and the economic case for Britain is clear and unambiguous, the United Kingdom should be part of it. Therefore, the United Kingdom Government has for the first time stated that, in principle, membership of a successful single currency would be beneficial for Britain and Europe.
The Chancellor of the Exchequer also said that it is in the United Kingdom's national interest for the single currency to work. In particular, the United Kingdom will use its position during its EU Presidency to play a full part in ensuring a smooth launch of the single currency and has also indicated a determination to prepare intensively for its introduction. The European Commission has welcomed the overall positive United Kingdom's attitude towards the euro and its determination to prepare intensively for the introduction of the single currency. I, too, welcome the constructive approach being adopted by the British Government.
While a decision by the United Kingdom to enter EMU would have positive aspects for the Irish economy, it is a matter for the United Kingdom Government to exercise, as it wishes, the discretion it is afforded by the treaty. My priority remains ensuring that Ireland qualifies for EMU and will take part in the third stage from the beginning. When the Maastricht Treaty received the endorsement of the Irish people, this was given without qualification or any provision for Ireland to opt out from the provisions for economic and monetary union. Membership of EMU, irrespective of what the United Kingdom does, will on balance be of benefit for Ireland — an assessment borne out in studies by both the Economic and Social Research Institute and the National Economic and Social Council.
The ESRI's EMU study considered, in a situation where Ireland goes into EMU and the United Kingdom stays out, both the possibility of sterling strength and sterling weakness against the euro. The estimate of 1 per cent of GNP over the medium term presented in the ESRI study of the cost of the loss of exchange rate flexibility for the Irish economy allows for periods of sterling strength, as has been experienced since summer 1996. When estimating the cost to the Irish economy of the loss of the exchange rate instrument in EMU the ESRI assumed that sterling would behave against the euro as it had behaved against the deutschmark, that is, a depreciating trend in sterling over time, interrupted by periods of sterling strength, reversed by sharp downward movements in sterling.
The ESRI study went on to analyse in some detail the impact of an extreme scenario of a sharp 20 per cent sterling depreciation. It also analysed the impact of an oil price shock, which leads — with the UK outside EMU — to a medium term sterling appreciation of 12 per cent. That a sharp 20 per cent sterling appreciation was not explicitly assessed does not bias the results of the study since the ESRI's findings are based on the behaviour of sterling against the DM historically — which includes periods of sterling appreciation and depreciation — and also draws on the likely impact of each as disclosed by the scenario analysis carried out in the report.
In any event, it should be recalled that, in addition to the requirements to co-ordinate economic policies and to avoid excessive deficits, the Treaty on European Union requires all non-participating member states to treat exchange rate policy as a matter of common interest.
The overall conclusion of the ESRI study, that EMU membership by Ireland would yield a net overall benefit to the Irish economy even if the UK was not to participate, remains valid.
I believe EMU will start on time and Ireland will play its full part from the start. Ireland approaches EMU from a position of considerable strength. The priority now is to prepare for successful participation.