Should Europe shoulder more responsibility in the world economy as the US has been urging for many months now, by pursuing a more expansionary macroeconomic policy to counter "imbalances in the world economy that cannot go away for ever"?

Ever since I can remember the American administration has been urging Europeans to boost demand. This has been so whatever the party of the president and irrespective of who has been running the Treasury department. The Fed has sometimes been in on this game, but not always. The danger is of the boy who cried wolf. When there really was a wolf nobody believed him. The same applies to US strictures on European economic policy. Even if the Americans now have a case it sounds all too much like the same old tune.
If you mean by the imbalance in the world economy the large US current account deficit, then it can go on if not forever, for a very long time indeed. There is no law of the Medes and the Persians that says that current account balances should be zero. You can see the absurdity of this if you realise that according to normal accounting conventions a current account deficit is the mirror image of a capital surplus - in other words an inflow of investment funds.
To say that these balances should be zero is to say that there should not be any international capital flows. Some people who realise this assume that capital outflows should be from the US to emerging countries. But that is simply conventional wisdom. The US might well be a huge developing economy itself. In any case when the US saves much too little in relation to its domestic investment, and other countries - above all Japan - save too much, it is only rational to allow savings to move to the country with the deficiency. But there is no need for a great new plan. It will happen automatically with free capital markets and a floating rate of exchange.
Above all, running a current deficit is not a burden. It means that Americans are absorbing more goods and services than they are producing, which is surely a pleasure and not a pain. If the process goes too far, in the sense that the foreign exchange markets begin to worry about the servicing costs of the overseas debt, then the dollar will fall automatically as a corrective mechanism.
A number of East Asian countries have to be in current account surplus to service the obligations they have incurred following the recent economic crisis. Japan will probably need to export even more if the Japanese economy is to revive. As a matter of arithmetic other countries will have to move into current account deficit. But these things are much less badly sorted out by the foreign exchange market than by committees of wise central bankers or journalists ineffectually attempting to allocate the plusses and minuses.
The case for a more expansionary Europe macroeconomic policy must be argues on its merits and not on the basis of reducing some imaginary American burden.

Has the ECB damaged its credibility by not cutting rates sooner?

Some people say that the ECB damaged its credibility by not cutting interest rates in the first three months of 1999. Others say that it must at all costs withstand political pressure to cut short-term interest rates in order to show that it cannot be pushed around.
Both strictures are wrong. The job of the ECB is to pursue sound policies for the euro zone. To the extent that it dies so it will establish credibility. There is no way of achieving this overnight.
Much of the comment around the time of Lafontaine's departure assumed that grown men in charge of European monetary policy would refuse to make a desirable cut to spite the German finance minister; or would afterwards cut rates faster because a hate figure had gone.

What has gone wrong in Europe's core economies? Of the two widely cited problems with core European economies, structural rigidities or inadequate aggregate demand, which is more important to deal with?

Do I have to go over all the usual arguments comparing American performance with that of Europe's core economies? The upward creep of European unemployment rates for so many years and from one business cycle to another can hardly be blamed on aggregate demand.
The main problem is structural rigidities. But that is simply code for saying that labour costs are too high. The roundabout jargonised formulae may have an advantage in enabling left-of-centre politicians to admit that workers can be priced out of jobs. But the rest of us can use plain words.
The genuine complication is that the inflation of labour costs has taken the form not so much of excessive wages as of social overheads such as high payroll taxes and regulations making hiring and firing prohibitively expensive. Having said that, there is no need to aggravate the problem with inadequate demand.
There is a further point that, although inadequate demand may be less important that pricing out of work, it is easier to deal with and is something which - unlike the labour and product markets - is within the powers of the ECB.

Do you think that greater wage and price flexibility that are needed to make a success out of monetary union will develop in Euroland?

My guess is that greater flexibility will develop, although too slowly. It is unlikely to come from a conversion of the European elites to what they call Anglo-Saxon economics. It is much more likely to come from management and unions finding ways round the more damaging restrictions. Interestingly enough the lead now seems to dome from the Länder of the former East Germany, who are so handicapped by collective bargaining and social security arrangements made to suit conditions in the south-west of the country that they are finding ways around it. In Italy too the leading edge of the economy consists, not of the tycoons whose takeover bids make the headlines, but the mass of medium and small scale enterprises who are freer to adjust remuneration packages to local labour markets.
Even France is benefiting from the national readiness to bend or adjust regional laws, such as that for the 35-hour-wek, in contrast to the more rigid observances in northern Europe.

There has been much criticism of the lack of accountability of the ECB. How can central bank independence be made more legitimate?

The ECB is hardly less accountable than the monetary policy committee (MPC) of the Bank of England. The members of the MPC are appointed by the democratically-elected British government. The members of the ECB are appointed by the democratically-elected governments of the euro zone. The governor of the Bank of England gives evidence, with colleagues, to the Treasury Committee of the British House of Commons. Wim Duisenberg does the same to the European Parliament.
The ECB does not help itself by its often somewhat clumsy use of words. One example is the artificial row over the non-publication of minutes. Some ECB leaders seem to understand by minutes a verbatim account of who said what at council meetings. The Bank of England minutes are a summary in the best British civil service tradition of the main analytical points. It is not all that different from the ECB's monthly bulletin which is published three times as frequently as the Bank of England inflation report. I usually find that the people who make most noise about the ECB's lack of accountability have never read its monthly bulletin.

Is "Europe" an elitist project?

Of course it is. You only have to listen to the way it is discussed by many supporters. We have the usual nods and winks and the implications that doubters are "unsound" without any further explanation. There is a code shorthand in which members of any establishment talk to each other to separate themselves from the great unwashed; it certainly applies to European integration.
But there are worse things than elitism. It would be very much worse if the initiative were passed to those groups which broadcasters like to call the extreme right, but who are really national socialists and who combine hatred of foreigners and minorities with protectionism and economic illiteracy.
European integration is much more a political than an economic project but the nature of the politics needs to be rethought. The original idea of the Schumann Plan and the Treaty of Rome was to bind together the economies of France and Germany and their near neighbours so closely that a new European war between them would become inconceivable. Some political leaders have tried to renew this idea by saying that Germany can only be safely reunited in a tightly-knit western European framework. Ironically it was German leaders of Helmut Kohl's generation who were most strongly of this opinion.
But surely today's political threats and opportunities are very different. The constant factor in European politics for a century and a half have been the conflagrations that start in the Balkans. The opportunities lie in the bringing in to the European family of the central European countries that were excluded by force during the period of Soviet domination. It does not seem to me that the battle between the federalists and those who want a "Europe of nations" has any relevance to the failure of the continent to get its act together in the face of both the problems and the opportunities.

To what factors would you attribute the performance of the US economy over the 1990s?

Is it success that has to be explained or is it failure? Given certain institutional requirements such as a free market within a framework of law, security and adequate public services, economic growth is to be expected, at least while technological opportunities are still expanding.
The US is a far more bureaucratised country than the Europeans realise. But regulation takes the form of endless litigation through the courts rather than edicts by government officials or collective bargainers. Nevertheless there was a blitz on excessive regulation in the US in the 1980s - some coming from the Reagan administration, but some of it also from Democrat-dominated congressional committees. The reduction in the role of unions was important, though I suspect it would have happened even without the Reagan administration.
An analysis by Thomas Mayer of Goldman Sachs, Frankfurt office, is illuminating. He points out that industrial restructuring has two parts. There is first a blitz on excessive costs and unprofitable operations. This tends to create unemployment. But in a well functioning economy there is a second stage when the unemployed (or for that matter previously initiative members of the population) are drawn into work by new enterprises, processes and products. This second stage has not happened in Europe because large companies are not allowed to pay the going rate for labour; and smaller companies are hamstrung by expensive rules and taxes. I hope they will be able to overcome these without too much damage to the rule of law.
The mistake that some financial economists make is to rush from these arguments to seeing the US as a paradise it certainly is not as anyone can see by looking out of the automobile in a drive from the inner cities to the affluent outlying towns. (cf Tom Wolfe, Bonfire of the Vanities). The US has a much higher prison population in relation to its total population than almost any other country - and by an astonishingly high factor. Many of those who would be unemployed in Europe are in prison in the US - not to speak of the strange attraction that Americans seem to have for the death penalty.
Economic commentators cannot just brush these matters off as belonging to other disciplines. Some kind of combination of the better points of the two sides of the Atlantic would indeed be worth having. It is unfortunate that too many political leaders have made the Third Way a term of contempt either because of its vagueness or, more seriously, because of its authoritarian connotations.

It is almost a cliché to say an asset price bubble exists in the US, but does that mean it is no longer a problem?

Whenever there is an asset bubble we are never short of explanation of why it is not a bubble and why stock prices, or tulip prices or whatever, can go even higher. Of course I cannot be sure that the Dow Jones will not go to 20,000 or 30,000 or 100,000. It is a matter of the balance of risks.
Here is one rare case where private finance is easier than public policy. Bernard Baruch said that nobody lost his shirt from taking his profit. An investor who moves out of Wall Street or limits his position may forego wealth beyond measure, but he will not be sleeping on the street.

In general, how much attention should central banks pay in setting interest rates to asset prices?

It would be absurd for central banks to have a target for Wall Street, London or Frankfurt. They cannot make themselves responsible for maintaining stock market and if they try they will fall flat on their face.
Asset prices do however come into the reckoning as an influence on the level of demand - much more in the US than in continental Europe. Wall Street is relevant to the Fed because a bubble there can aggravate inflationary overheating and a crash could trigger off a recession or even worse. But it is the effects on economic activity and inflation that matter and need to be monitored.

Is it down to political judgement whether the UK should enter Emu? If the UK should enter when would be the best time?

There is never a best time to do anything. It is extremely unlikely that sterling will be at what the "Great and the Good" regard as the appropriate level when the Blair government happens to be ready to risk a referendum on the subject. The best time to join is when the government thinks it can get away with it politically.
What is however is shaming is the way the prime minister and his circle seem so mesmerised by the Murdoch press. It is a little like a fierce dog. It is dangerous because political leaders are afraid of it. If they ceased to be afraid it would cease to be so dangerous.
It is in any case humiliating that a national leader with an overwhelming parliamentary majority should tremble before some foreign press tycoon. It would be more honourable to go down fighting than to allow such a humiliation. This is all on the assumption that Tony Blair's instincts on the euro are correct; and please spare me a discussion of this.

How would you rate the performance of the Bank of England since it was given its independence?

I feel about the Bank of England as I used to feel about the Treasury. A few of us who are watching it closely can criticise its detailed performance. It is nevertheless better by several orders of magnitude than the policies urged by its leading critics who would take us back to the double digit inflation of the 1970s without any improvement in employment or in social harmony to compensate.
But on a more microscopic examination there are some things to say. First of all, the last few years have been an extremely favourable period. Most of the hard work of getting inflation down had already been achieved by the time the Bank became independent and even by he time it was given more responsibility under the "Ken-Eddie" regime in 1993-4. It is unfashionable to say so; but part of the credit for the reduction in inflation and inflationary expectations is due to Britain's two-year period inside the European monetary system 1990-92. Indeed Norman Lamont used to say this himself. Sometimes fate plays kind tricks. The UK may have been helped both by the period inside the ERM and the decision to leave in 1992 which had to be followed by a fairly tight domestic anti-inflationary regime for the sake of "credibility", to use that dreadful word again.
Unlike many City observers I am not really convinced that the UK was undergoing an incipient inflationary boom when the Labour government took over in 1997. It suited both the Bank of England, which had been rebuffed on interest rates by Kenneth Clarke, and the incoming government to say so. It also suited puritanical City journalists who always say that fiscal policy is not tight enough or - as some Treasury officials used to put it - that Britain is "undertaxed". Therefore, they argue, the UK has to be punished by high interest rates.
My own view is that the interest rate increases in the first half of 1998 were ill-advised. Some of the structural changes which have allowed the US economy to be run at a lower rate of unemployment and a higher rate of capacity utilisation may also apply in the UK. But I cannot pretend that the interest rate increases did much harm, especially as they were so quickly reversed.

Is an inflation target the best monetary policy strategy for the UK to pursue? Which alternative strategy would be better?

If we were starting from here, an inflation target would not be the best strategy to pursue. This can be seen from the emphasis put on not undershooting as well as not overshooting the 2.5 per cent objective. But does anyone think that 1 per cent would be a failure if it were accomplished by rapid growth and low unemployment, as it could well be one day? The case for a nominal demand objective is made out in my published works and has never been adequately answered except by technocratic jibes about the lag and revisions in nominal GDP data. In a nutshell, if we had a nominal GDP objective of say 5 per cent growth per annum, policy would concentrate on real output and growth when inflation was low. On the other hand if inflation rose the price objective would gain in importance and eventually become the dominant one. And we would become less dependent on forecasts.
But the last thing that I am advocating is yet another regime change either in the UK or in the euro zone. Let the MPC and the ECB stick to their inflation objectives, but remember two other things. The first is their obligation to support the economic policies of government if this can be done without jeopardising price stability. Secondly, there are bound to be times when an inflation target is either an overshot or undershot and in these cases it may be wise to return only gradually to the target path.
What I am really arguing for is somewhat less emphatic insistence on short-term fine tuning and much more emphasis on achieving sustainable non-inflationary growth over a period of years. Does anyone think even that will be easy?

Should the UK Treasury have intervened in the currency markets over the last few years to prevent the appreciation of sterling that some economists say has been severely damaging to manufacturing industry?

Policymakers seem to go to extremes in either using the exchange rate as an anchor or insisting that it does not matter at all. The orthodox position is that central banks take the exchange rate into account as a factor affecting inflation.
This should be taken with a pinch of salt. If the exchange rate rose so high as to endanger large sections of the British export industry, some rationalisation would be found for relaxing monetary policy and nudging the exchange rate down. The reason why this has not happened is that sterling has not been overvalued as often supposed. The severe recession which some people expected as a result of the overvaluation of sterling has not occurred and British business has been able to live with an interest rate policy dictated by domestic requirements.