By Mervyn King, Executive director of the Bank of England
Mervyn King, an Executive Director of the Bank, discusses some of the economic issues facing Europe in the 1990s. Concerns over the present conjunctural position-in particular slow growth and high real interest rates-should not, he argues, disrupt medium-term policies to raise economic growth and to ensure price stability. The current constraints on monetary policy, for which Germany is usually blamed, are the result of a collective, self-imposed attempt to enhance the credibility of Europe's commitment to price stability. This has had some success. At the same time, there is no reason to suppose that deutschmark interest rates necessarily represent the floor for short-term rates within a fully credible ERM. Furthermore, high short-term interest rates may not be as depressing a factor in investment as sometimes supposed; while long-term rates (which, unlike short-term rates, are at similar levels in the United States, Japan and Europe) reflect less the stance of monetary policy than the fundamental factors of investment opportunities and saving in the world economy. Mr King concludes by looking at some of the policies that will be necessary for growth and stability over the longer term, stressing first, the need for the EC to open its markets to developed and developing nations; and second, the importance of placing monetary policy in the hands of an independent central bank.