Future EMU relations with outsiders seen as `crucial' for future

THE relationship between countries in the European Monetary Union and those outside it is crucial and arrangements will be put in place to regulate it, the governor of the Central Bank, Mr Maurice O'Connell, said.

Speaking to the Oireachtas Select Committee on Finance and General Affairs, Mr O'Connell said central banks across Europe were discussing the issue ahead of the meeting of EU finance ministers in April.

"The key question is flexibility," he said. He added there are "various possibilities" and admitted an ERM II (exchange rate mechanism) type of arrangement could be one of them.

"Even if Britain stays out, there will be some arrangements," he said. "There might be some kind of linkage like the ERM, or there could be a different arrangement for each currency, taking into account how close to convergence that economy is."

Mr O'Connell also supported calls from Mr Philip Halpin, head of Treasury at National Irish Bank, that a "stabilisation" feature was needed in the Union. Although he stressed that it was not his responsibility and any decision must be left to the politicians.

"Any transfer of funds to compensate for a shock is not on the agenda. There is nothing yet in the monetary policy area, although I have no problem with the idea in principle," he said.

A stabilisation fund would give the union the flexibility to help with unforeseen economic shocks. These could be anything from the unification of Germany to the impact on Finland of the break-up of the USSR, Mr Halpin said.

"Ireland must get this on the agenda for the next inter-governmental conference (IGC)," he said.

The fund would be available to all participants. Without a fund of this kind there is a danger that the burden of any adjustment could fall on the labour market, he said.

The fund could also potentially be used if sterling depreciated, leaving many Irish exporters vulnerable. "We would be entitled to some assistance so industry could be helped in riding out any problems," Mr Halpin said.

Mr O'Connell also confirmed that interest rate decisions in Ireland were used primarily as a way of maintaining the exchange rate".

The bank's primary objective is price stability, he said. There is a brief to ensure we meet the price and exchange rate criteria for EMU.

He said the subsequent appreciation of the pound against sterling had created "difficulties" for some of the labour-intensive sectors of Irish industry. "The sectors particularly in the front-line are food processing, metals manufacturing, textiles and clothing," he said.

Mr O'Connell also stressed that a delay in EMU would offer no assurance that member-states would be better prepared.