In this issue we devote special attention to the proposals for economic and monetary union in Europe. First we summarise our forecasts for domestic and world economy prospects; both have been constructed on the assumption that European economic and monetary union will be completed by the beginning of 1997—although an earlier date than that is possible.

Since last November we have based our forecasts on the assumption that the UK will soon become a full member of the European Monetary System. There has been no change in the official position on entry to confirm or correct that assumption, but recent hints and rumours make clear that it is the right assumption to make. We retain it for this forecast. The actual date of entry is now more likely to be in the first half of next year; a fall in the rate of inflation is seen as a precondition, and it is one which may not now be fulfilled as soon as we had hoped. We assume that some announcement on the ERM is made about the end of the year, permitting an interest-rate cut in the first quarter, followed by formal accession by the second quarter, about the time of the Budget.

In the last six months political and economic developments in Europe have moved very rapidly. The democratisation of the East has been quite remarkable, and much heralded, but the change in the political agenda in the West has been almost as important, although much quieter. The drive toward European Monetary Union seems to have speeded up, although there are many important issues still to be settled.

The high unemployment of the last 15 years has brought with it a proliferation of special employment measures (SEMs). These measures all involve intervention in the labour market with varied aims and means but with a common theme namely the reduction of the claimant count of unemployment. Initially introduced as a short-term response to what was hoped to be a transient problem, the use of SEMs has now become permanent. The gradual movement from transience to permanence has coloured much of the development of these schemes and understanding it gives a clearer insight into the objectives and underlying theoretical perspective of SEMs. For although SEMs may appear as a continuum there have been a number of changes of direction in their development.

The Delors report on monetary union in Europe has enlivened the debate on European monetary integration. We would argue that the debate has avoided one of the major issues it should be addressing. There has been very little discussion of the performance of a monetary union when there are external shocks. It is not obvious that a monetary union would cope better with external shocks than would the individual components of the union if they were free to respond. Both exchange-rate and monetary policies can be seen as shock absorbers. Their use can reflect the structural differences between economies, allowing both for differences in comparative advantage that arise from natural endowments such as oil reserves and for differences in wage and price behaviour which, although not immutable, may take some time to remove.

Comparative labour costs in the manufacturing industries have been analysed in four previous issues of this Review based on surveys of labour costs published by the Swedish Employers' Confederation. These contain time series of wages for time worked, social charges and total labour costs in manufacturing for most OECD countries and convert them into a common currency. Although no allowance is made for the different purchasing power of the wages paid (‘PPPs’) the comparison is useful since the products of the industries of various countries compete on international markets on the basis of current exchange rates.

What accounts for the productivity improvement experienced in manufacturing since 1979? Answers to this question are sought from a regression analysis of 93 manufacturing industries over the period 1971-86. The main findings are that when other influences, such as raw material prices and the shock of the 1980-1 recession, are eliminated, there has been an improvement in the 1980s in the growth rate of productivity whose impact effect averaged 4 per cent per annum. Between a quarter and a half of this is attributable to a decline in the disadvantages of unionisation.