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The City reaction to Mr Major's first Budget was generally one of disappointment, partly because fiscal policy was perceived as lax, partly because nothing new was said about the European Monetary System (EMS). Subsequent ministerial speeches gave a more positive tone to the Government's attitude to the EMS, and the Governor of the Bank of England has signalled that the debate over sterling's full entry to the EMS should now be moving on from 'whether' to 'how', and in particular to the issue of the level at which sterling joins. Moreover, possibly the most important hint yet that UK entry is getting close was given by Sir Alan Walters, who seems to have relaxed his anti-EMS stance markedly. He indicated that economics would be only one part of the Government's eventual decision on whether or not to join. 'Mayber there are costs worth paying', he said. In this paper I will briefly review the fiscal stance of the Budget, and then turn to the key issue of 'how' sterling should join the EMS.

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