Challenges of EMU 

As well as benefits, EMU presents challenges. The obvious one is that participating Member States cannot devalue their currencies for any reason. In addition, a single monetary policy necessarily involves some pooling of sovereignty among participating Member States. This disadvantage will probably be felt more keenly in the larger Member States, as the discretion about monetary policy enjoyed by smaller Member States was considerably less.  

It might be argued that the restrictions on budgetary freedom under the Stability and Growth Pact, especially the exposure to possible sanctions under the Treaty, are a disadvantage of EMU participation. There are, however, a number of points to be made about this:  

• first of all, the obligation to avoid an excessive deficit as defined in the Treaty applies from the start of Stage Three, irrespective of EMU participation. Only the sanctions will be new, and, in any case, failure to abide by a Council notice to correct an excessive deficit would already have expose a country to a suspension of Cohesion Fund aid; 
• while non-participation in EMU would exclude the possibility of formal Treaty sanctions for an excessive deficit, there is no doubt but that financial markets would impose a penalty in the form of higher interest rates in the event of such a deficit; and 
• avoiding an excessive deficit is in our own interest: our experience over recent years shows that keeping our deficit within the Treaty parameters is fully consistent with sustained growth in output and employment. Indeed, keeping our deficit within the 3% ceiling has not precluded improvement in public services and significant progress on tax reform. 

The move to EMU will of course necessarily involve transition costs for business, public administrations and financial institutions. In looking at these, however, it is important to bear in mind that they are an investment aimed at producing long-term benefits for the whole economy.  

In the case of financial institutions, there will also be an ongoing loss arising from the elimination of transaction costs and exchange rate differentials between participating currencies. However, this ongoing loss of revenue to the financial institutions will be an ongoing gain to traders and business (as well as to individuals), and should help them to improve their performance: healthier companies will in turn be of benefit to the financial institutions.