Joining Emu may be a long way off, but the UK could show it is serious by adopting the European Central Bank's inflation index

Here are a few suggestions on how to overcome some of the practical obstacles to UK membership of the European economic and monetary union. A full discussion of whether this is a good idea will have to be deferred.

Both the Bank of England's monetary policy committee and the European Central Bank provide regimes that are capable of securing non-inflationary growth. Each has its advantages and faults; and it is roughly half a dozen of one and six of the other.

There are Eurosceptics who fear that simply joining the euro will somehow infect the UK with German labour costs and rigidities. There are Euro-enthusiasts who hope that British membership will - like Joshua blowing his trumpet outside the Wall of Jericho - cause these rigidities to disappear and the entire euro-zone to move towards greater flexibility. Neither of these hypotheses seems plausible.

The Treasury's biggest worry is different. It is that the UK may have to join at a higher exchange rate and a lower interest rate than would be justified by domestic economic conditions. There are signs that Tony Blair has been alerted to these problems and has started to steer people away from expecting membership necessarily to come soon after the next election. But if he keeps postponing the decision, the time may never arrive.

The International Monetary Fund declared that the UK must eventually take some positive policy action if it is to join Emu on schedule.

Chancellor Gordon Brown on the other hand, shows no sign of changing the terms of reference for the MPC and reiterates that its main job is to achieve the 2 1/2 per cent inflation target.

Continental European officials still emphasise that the UK must rejoin the European exchange rate mechanism before it can join Emu, in line with the Maastricht treaty. Even if the British side can get round that, the entry rate will have to be negotiated. There can be no question of the UK government picking its own rate as it did when it joined the ERM in 1990. If British politicians think that a high-level summit conversation will brush aside the bureaucrats' conditions, they still have a lot to learn about how Europe works.

It will be difficult for the UK to negotiate an entry rate much lower than the market rate, especially as the core euro country, Germany, is more uncompetitive than the UK and will not be too keen on Britain obtaining a trade advantage from euro entry. It is likely that by the next election sterling's market exchange rate will still be about the equivalent of DM2.80 while most official and academic estimates of a desirable entry are somewhere between DM2.50 and DM2.60.

Would that prospect really be so disastrous? Discussion is clouded by wrong-headed comparisons with the period of ERM membership in 1990-92.

Sterling came under pressure in 1992 because the financial markets did not believe that the government could hold the exchange rate. In Emu there would be no sterling rate to hold.

Under Emu conditions an uncompetitive entry rate would show itself differently: in an unnecessarily high rate of unemployment and unused capacity. But there are few signs of this occurring. In fact, despite the blip in the first quarter gross domestic product figures, analysts have been surprised at the "soft landing" that Britain has achieved, even at the still higher prevailing sterling rate of nearly DM3, and the failure of unemployment to rise.

Policymakers are more worried at the possibility of having to maintain an excessively low interest rate, associated with inflationary overheating.

The official hope is that a policy of promoting stability on a domestic basis, avoiding boom and bust, will eventually eliminate the need for an interest differential between the UK and the continental core countries.

Some UK officials had in mind a picture of European growth accelerating, and thus enabling the ECB to raise rates above the present 2 1/2 per cent. They also envisaged the UK requiring a period of falling interest rates to get output back on trend after its recent slowdown. But it is all too likely that the core European economies will remain sluggish, thus requiring continued stimulus.

In reality it could be that because of the market-friendly policies operated by successive UK governments, animal spirits will remain higher in the UK and that total spending on consumption and investment will require restraint rather than stimulus. Indeed, according to the latest Bank of England analysis, the financial markets expect UK short-term interest rates to be slightly higher than the present 5 1/4 per cent level, a year from now. Even the more optimistic forecasts (optimistic on interest rates but pessimistic on the economy) do not expect anything much lower than 4 1/2 per cent. Thus convergence between the UK and the euro-zone may take a long time.

May I put forward a positive suggestion, which is less radical than it seems? This is that the way to achieve the required convergence is to lower the UK inflation target to 1 per cent and at the same time shift the basis to the European Union Harmonised Index of Consumer Prices. The ECB declares that by price stability it means an inflation rate of 0 per cent to 2 per cent. The mid-point is 1 per cent; and it is to this level that the UK target should be reduced.

There is a paradox about using short-term interest rates as the main weapon against inflation. The principal influence on the average level of nominal interest rates is the expected rate of inflation. It is because the actual and the underlying average inflation rate in the euro-zone is about 1 per cent that the ECB can afford to have a short-term interest rate of 2 1/2 per cent.

On the other hand a reduction of inflation normally involves a temporary period of higher nominal interest rates before the desired goal of lower rates can be achieved.

The MPC was originally given an inflation target of 2 1/2 per cent as a rough-and-ready way of saying that the government did not want policy to be too restrictive and promote unnecessary recession. This was plausible after a decade in which inflation had fluctuated around 5 per cent. But now that actual and expected inflation are near 2 1/2 per cent a reduction in the target does not seem so draconian. Indeed, when introducing the present target, Mr Brown said he would keep in mind the possibility of reducing it later.

A target reduction will seem less draconian if it is combined with a shift in the basis from the present RPIX (the Retail Prices Index, excluding mortgage interest) to the HICP used by the European Central Bank. The chancellor's main objection so far to the harmonised index is that it still excludes too many items and has yet to be "bedded down". But with every month that passes these defects are reduced.

Average UK inflation, measured by the harmonised index, has been about 1 percentage point less than when measured by RPIX.

Thus if the UK were to move to the harmonised index the effective reduction of the target would amount to about half a percentage point. Announcing the two changes together would underline the seriousness of the government's intentions without committing it to any timetable. It would also make sense outside the Emu context.

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