Macroeconomic Policy Coordination and Membership of the Single European Currency: Another Case of British Exceptionalism? COLIN HAY The quality of the debate on Britain's potential membership of the single Euro- pean currency (SEC) is notoriously poor, the choice invariably reduced to a gut political response to a question couched in terms of national sovereignty, where no distinction between sovereignty and autonomy is even acknowledged. This is something of a tragedy, since a series of exceptionally important and yet complex and technical issues are at stake. Open discussion of such issues is a condition of an informed choice in any referendum on the euro, and it is in this spirit that the presentÐmodestÐcontribution is in- tended. Yet the aim of this article is neither to review the debate in which we are cur- rently engaged (if `debate' is indeed the appropriate term), nor systematically to draw up a balance sheet of the respective merits and demerits of British member- ship of the SEC. Rather, I hope to intro- duce an important set of considerations that are largely absent from the existing debate, academic or otherwise. These re- late in general terms to the prospective conduct of British macroeconomic policy withintheeurozone and, more speci®cally, to the coordination of ®scal and monetary policy in a situation in which interest rates are set by the European Central Bank (ECB). My argument is simply stated, though, as is ever the case in such matters, the devil is in the detail. The merits or de- merits of British membership of the euro zone, I suggest, cannot simply be reduced to the Chancellor's ®ve economic tests, important though many of these clearly are. The decision on the euro is not merely a question of whether member- ship of the SECÐsomething external and self-containedÐis `good' or `bad' for Brit- ain in aggregate economic terms. It is also, crucially, a question of the conduct of macroeconomic policy by a British govern- ment within the euro zone. Whether the euro is good or bad for Britain depends not merely on what the SEC does for Britain but, equally, on how Britain adapts to the euro. Thus far there has been virtually no discussion of this cru- cial issue. Indeed, it has scarcely been mentioned either in the Treasury's initial assessment of the ®ve economic tests in 1997 or in its subsequent reports on euro preparations. In one sense, this is not surprising since, as I will argue, member- ship of the SEC entailsÐif the govern- ment is to remain true to the anti- in¯ationary commitments that have thus far characterised its macroeconomic stanceÐa fundamental change both in the conduct of economic policy and, more signi®cantly, in the rationale under- pinning macroeconomic coordination in Britain since 1997. Quite simply, member- ship of the SEC compromises the prin- ciples underpinning the decision to cede operational independence to the Bank of England and, with it, arguably, the core # The Political Quarterly Publishing Co. Ltd. 2003 Published by Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA 91