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EMU could cost 500,000 UK jobs

Joining a single currency in 1999 would cost Britain half a million jobs over the next four years, a leading group of economic forecasters is expected to say in a report tomorrow.

The report, based on the Treasury's own computer models, will follow close on the heels of a study on labour mobility today suggesting that European Monetary Union only makes sense for a core group of six countries, not including Britain.

Both will bolster the fears of Eurosceptics in particular about the potential depressing effects of monetary union and its toll on jobs.

Accountants Ernst & Young, part of the Item (Independent Treasury Economic Model) Club - a consortium of blue-chip companies including British Aerospace, Bass, Rover, MFI, Schroders and HSBC - has calculated the cost of keeping the UK's economic performance within the strict Maastricht convergence guidelines. Item reckons that, should the Government seek to meet the criteria, 500,000 fewer people would be employed than if the UK went it alone.

According to the treaty, debt would have to be kept below 60 per cent of gross domestic product, and the general government borrowing requirement would have to be less than 3 per cent of GDP.

Inflation would have to be kept to within a narrow band, set by the three best economies in the Union.

After altering some of the 350 variables that feed into the Treasury's computer model of the economy, the Item Club is expected to say that for the UK to meet those guidelines at the end of the century would require higher taxes and interest rates and lower government spending in the interim. That would put the brakes on the economy.

Unemployment might still fall, however, though not as fast as it would under optimal policies. Economic growth would also be at average levels instead of those expected during a moderate boom - a loss of about 1 per cent a year.

The report today from the Union Bank of Switzerland argues that early monetary union only makes sense for a core group of countries - including France and Germany - that have already synchronised their economic cycles, but not for countries such as Britain that run closer to the US pattern.

Economies at different points on the boom and bust cycle require different monetary policies, creating stresses that are usually relieved by exchange- rate shifts. Under monetary union that pressure valve would no longer be available.

In the US - the only comparable union with a developed economy and a single currency - the internal tensions of regional economic cycles are eased in part by federal transfers of cash from rich to poor states. But the system has not always worked well, with banks in some states during the early part of the century refusing to respect the Federal Reserve's interest rates.

The UBS study notes that transfer payments are not available in Europe as a way of relieving pressure. In the US a combination of higher federal tax receipts in rich states and greater federal benefits payments in recession- struck states cut the economic losses in the latter by 40 per cent. In Europe, the figure is currently closer to 5 per cent.

The other mechanism used in the US, and proposed for Europe, is labour mobility. Americans in recession-hit regions of the country are quite willing to migrate to other areas in search of work, lowering unemployment in the states they leave and reducing inflationary pressures in the ones to which they move. But the UBS research shows that Europeans are far less likely to cross borders, and are becoming even less inclined to do so.