Memorandum from the Treasury
The Treasury welcomes the opportunity to respond
to the main conclusions in the Committee's report, which was published
on 8 December 2000.
THE FIVE
ECONOMIC TESTS
2. The report starts by noting the Government's
policy with respect to Membership of the single currency. The
Government has said it will only recommend joining a successful
single currency if it is in our national economic interest to
do so, and if the economic case for the UK joining is clear and
unambiguous.
3. The report lists a number of criteria
by which the success of the single currency could be measured.
The Chancellor's comments at the hearing of the House of Commons
Treasury Committee on 25 July 2000 made clear that:
". . . the test of the success of the euro
is implicit in the five domestic tests that we are applying"
ECONOMIC DEVELOPMENTS
4. The Commission's Spring 2000 forecasts
projected that GDP was likely to show relatively robust growth
rates of just below 3.5 per cent and around 3.1 per cent respectively
in 2000 and 2001. The most up to date forecasts available, by
the Consensus survey in January 2001, projected growth of 3.3
per cent in 2000 and 2.9 per cent in 2001.
5. The strength of oil prices and the weakness
of the euro continued to put upward pressure on inflation during
the remainder of 2000. The harmonised index of consumer prices
(HICP) inflation reached 2.8 per cent in November, falling back
to 2.6 per cent in December. The rise in core inflation (headline
inflation excluding energy and food prices) has been more muted,
remaining at 1.5 per cent in December.
6. Oil prices have fallen by around $8 per
barrel from their autumn peak and by early January 2001 the euro
had appreciated by well over 10 per cent from the $0.83 level
seen in late November. The latest Consensus forecasts now expect
inflation to be around 2 per cent in 2001.
THE EUROPEAN
CENTRAL BANK
7. Openness and transparency are key to
ensuring the ECB gains the trust of the European public and financial
markets. They help provide the credibility needed to deliver monetary
policy effectively. This is a key feature of the UK Government's
new monetary policy framework.
8. Since the publication of the report,
in December, the ECB has published, for the first time, its staff
macroeconomic projections. The staff's projections for 2001 and
2002 are presented below:
ECB STAFF PROJECTIONS FOR THE EURO AREA DECEMBER
2000
(Average annual percentage change)
| | 1999
| 2000 | 2001
| 2002 |
| HICP | 1.1
| 2.3-2.5 | 1.8-2.8
| 1.3-2.5 |
| Real GDP | 2.5
| 3.2-3.6 | 2.6-3.6
| 2.5-3.5 |
| of which: |
| Private consumption | 2.8
| 2.3-2.7 | 2.2-3.2
| 1.7-3.3 |
| Government consumption | 1.4
| 0.8-2.0 | 0.6-1.6
| 0.9-1.9 |
| GFCF | 5.3
| 4.7-5.7 | 3.3-6.3
| 3.1-6.3 |
| Exports (goods and services) | 4.6
| 9.8-12.6 | 6.5-9.7
| 5.6-8.8 |
| Imports (goods and services) | 6.2
| 8.8-11.4 | 6.0-9.4
| 5.3-8.7 |
Source: ECB Monthly Bulletin, December 2000.
9. The provision of these projections is to be welcomed,
as it provides information on one of the inputs into the ECB Governing
Council's deliberations.
HM Treasury
February 2001
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