British interest rates have risen too far, too fast, the former British Chancellor of the Exchequer, Mr Kenneth Clarke, has said. Speaking to The Irish Times in advance of the ELEC Sean Lemass Memorial Lecture last night, Mr Clarke said he will be making a speech in the House of Commons today on the debate on the Bank of England's independence.
He added that he will be making the point that five interest rate rises is too many and is in danger of translating into a marked turndown in growth. According to Mr Clarke, the new government's move to allow the Bank of England limited independence means it is now under intense market pressure on a monthly basis and is in danger of being forced into further "potentially catastrophic" rises.
Speaking to the second European League for Economic Co-operation lecture sponsored by Scottish Provident and The Irish Times, Mr Clarke warned that sterling could become very unstable. "The competing gravitational pulls of the dollar and euro could leave the pound like a ping-pong ball between two footballs."
He added that this will make it difficult to negotiate the correct parity on entry, as well as risking considerable political difficulties.
One problem Mr Clarke highlighted was the difficulty in synchronising the British and European economies. "This is something of a chicken and egg problem, according to Mr Clarke. "One reason why the founding members of the single currency have been able to align their economies is precisely because the markets believe they will be founder members of monetary union."
This means that when Britain announces its intention to join, interest rates will start to converge. "The important thing is to ensure that they do not pass like ships in the night," he said.
According to Mr Clark the biggest concrete danger to monetary union lies in the risk that, during periods of recession, countries may start to run-up excessive deficits, free-riding on a common European interest rate.
He added that the British political parties have suffered a failure of nerve. "We are gripped by a less than dynamic debate between a party which thinks we should wait at least five years before joining and another which wants to wait 10 years before making up its mind," he said.
He added that the longer Britain remains outside the euro-zone, the bigger the disadvantages will become, and that delaying entry could also become more difficult to get in. Outside monetary union, the UK will also lose its attractiveness as the EU centre for inward investment. The other problem will be a declining influence on the economic environment on which Britain's well-being depends.
