Like all good central bankers, ECB President, Mr Wim Duisenberg, is measured and judicious when he speaks. Nonetheless, at the press conference following the European Central Bank's (ECB) April 8th rate cut, he made one revealing remark. Asked whether the ECB Council was unanimous in its support of the larger-than-expected half a percentage point cut, he replied that it was not and that some members were "inclined not to reduce interest rates at all".
This is surprising, as the case for an interest rate reduction was pretty clear cut. Euro zone growth has stalled (most notably in Germany and Italy), business confidence is deteriorating, double-digit unemployment prevails and inflation has been falling steadily for seven years and is now below 1 per cent.
Given this compelling "economic" case for a rate reduction, most commentators had assumed that the delay in implementation was due to the unwelcome intervention of Mr Oskar Lafontaine, the former German finance minister. His calls for lower rates had forced the ECB into a corner.
If it had cut, as he demanded, it might have been seen as submission to political interference. With Mr Lafontaine's departure last month, however, there was no reason for the ECB to delay further.
So why did some council members continue to oppose a reduction in rates and who were they? There has been speculation that the representatives of Europe's robus4t "peripheral" countries (of which, the Republic is the leading example) may have been the dissenters. However, the national central bank representatives are expected to consider the euro zone as a whole rather than their domestic economies, so this is not necessarily true.
Given that council votes are confidential, there is no means of identifying the individuals. However, we can consider whether the rate cut was in the Republic's long-term interests. At first glance, it seems obvious that it was not. Were Maurice O'Connell and his colleagues at the Central Bank still setting monetary policy independently, rates would be significantly higher. However, now that the Republic has joined EMU, one can argue that its interests are best served by stimulating a robust European recovery (notwithstanding the risk of domestic overheating). Why? Because, having joined EMU, it is imperative for all members that it succeeds. Moreover, if Europe remains in the doldrums, the probability of Britain seeking early entry is considerably lower.
The ESRI's 1996 report, Economic implications for Ireland of EMU, commissioned by the Government, concluded that the stance of Britain was the crux of the EMU question for the Republic. With Britain as a fellow participant, the implications would be unambiguously positive. With Britain on the outside, the Republic would be exposed to sterling volatility and membership would be only marginally beneficial.
Fortunately, the attitude of Tony Blair's government has progressed from one of cautious support, towards a more confident espousal. In February, Mr Blair announced a "plan for a national changeover". The planned timetable could see British euro notes and coins in 2003 and the fixing of exchange rates well before that.
However, Mr Blair has always emphasised that he would only be in favour of joining a "successful" euro. This is as much a recognition of reality as one of personal preference. Whilst the popularity of the British prime minister might sway some fence-sitters in a referendum, it would not swing the Eurosceptic masses. For this to happen, Europe must be seen to be an attractive place to link into and this requires a thriving European economy. Prior to the rate cut of April 8th, that prospect looked remote.
Ahead of the launch of EMU, a very different state of affairs prevailed. At that time, Europe looked set for a sustained cyclical recovery. The prospects for Britain, on the other hand, looked somewhat grimmer and a number of economists talked of outright recession (some even suggesting that it would rival the slump of the early 1990s). In such a scenario, the all-too-predictable Labour spin would have been that Britain's non-participation was the cause of its relatively poor performance.
Others amongst us pointed out that this British slowdown was different from its predecessors. Without the threat of inflation, the Bank of England was in a position to cut interest rates sharply to offset the impact of the emerging market crisis, making a severe downturn unlikely.
Time has validated this prediction. Interest rates have been cut by more than 2 per cent in little more than six months and sentiment has improved accordingly. Even British house prices are on the rise once more. Britain is still likely to have one of the lowest growth rates in Europe this year, but with unemployment standing at only 6.3 per cent, the scope to grow much faster is limited. Euro zone growth - likely to be in the vicinity of 2 per cent this year - will be superior, but not enough to seriously dent its 10.5 per cent unemployment rate (which is also bloated by Europe's structural problems).
Had the ECB left rates unchanged, it is difficult to envisage the differential between British and European unemployment being reduced and Mr Blair would have been hard-pushed to convince the British public that its interests would be best served by joining EMU. If the recent rate cut puts Europe on the road towards a more robust recovery, Mr Blair's task will be easier and the Republic's interests will have been best served.
Still unconvinced the rate cut suited the Republic? Then reconsider the situation in extremis. Imagine what would happen to Europe and EMU if interest rates were set with reference to conditions in the Republic alone. Kevin Daly is European Economist with Credit Lyonnais Securities Europe.
