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Which way for the euro?

The initial membership of Emu is decided, as is the board of the European Central Bank (ECB) and the exchange-rate parities for converting Emu participant currencies into the new euro on 1 January 1999.

The noise has been deafening about the interference of politicians in the appointment of the new ECB president. Many observers argue that it indicates that the ECB will not be independent in running Emu monetary policy. But anyone who looks at the personalities on the ECB board should be in no doubt that they will exert their authority pretty quickly. The governing council of Europe's new central bank will resist any attempt at political interference. Its monetary policy decisions will be directed solely at maintaining price stability.

The toughness of the ECB's monetary policy in the weeks after Emu starts is not the problem. The real problem is that low interest rates in the run-up to Emu are overcooking Europe's peripheral economies. Inflation in these countries will surge. So corporate competitiveness will be eroded and jobs will be lost. Peripheral equity markets may outperform in the short term.

The ECB will respond to overheating by tightening monetary policy more aggressively than the consensus expects.

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