Fate of single currency hangs in the balance

The success or failure of a single currency will depend on decisions made during the next year, according to an authoritative new report.

Professor David Currie of the London Business School argues in "The Pros and Cons of EMU" that the decisions European governments have not yet made - most crucially on the way that fiscal policy will work under monetary union and on reforming labour markets - will determine whether a single currency succeeds or fails.

The report says: "Going forward with EMU does not condemn Europe to failure, nor guarantee its success. And the same goes for abandoning the single currency project ... everything will depend on the wisdom of the choices that governments still have yet to make." The report is the most extensive and balanced so far into the pros and cons of the single currency project, and contrasts with the polemical tone of many reports on the subject.

Commissioned by the Economist Intelligence Unit, the report was sponsored by several leading international banks and companies, including ABN-Amro Hoare Govett, Kleinwort Benson, Prudential and Rothschilds.

The benefits of a single currency discussed in the report include gains to consumers from greater competition and the rationalisation of production across Europe, and low interest rates. The report says that although it is possible that the new euro could become a weak currency, "the euro countries are likely to enjoy low and stable inflation ... because of the attention that has been paid to the design of the European Central Bank."

The drawback, however, is that governments will not be able to use interest rates and exchange rates to respond to particular economic circumstances. The report says: "In many countries this freedom has been greatly abused: the cost of surrendering it is therefore smaller than might be thought. But in countries where monetary policy has been well conducted, the cost is significant."

Although the report is careful to maintain a balanced position and consider all the arguments it says: "We do expect EMU to happen. Far more tentatively we expect it to be a success, though not necessarily for all its members." Professor Currie believes that European unemployment will remain high and even intensify in some parts of the EMU zone.

He argues that coping with unemployment, and increasing the chances of EMU's success will require "appropriate reform of fiscal, welfare and labour market arrangements within the EU to remove undue rigidities in European economies. This would in part require the reform of the stability and growth pact."

The report says that individual nations should be able to borrow more over the economic cycle, to ease national economies through downturns, while maintaining constraints on excessive borrowing in the long run. At the moment the stability pact sets out fines for deficits in excess of 3 per cent of GDP, although it remains to be determined how strictly this would be interpreted. The report also suggests redirecting - and possibly expanding - EU spending towards regional unemployment rather than the Common Agricultural Policy. "It may well mean an evolution over time towards a form of fiscal federalism," it adds.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
Life and Style
Suited and booted in the Lanvin show at the Paris menswear collections
fashionParis Fashion Week
News
i100
Arts and Entertainment
Kara Tointon and Jeremy Piven star in Mr Selfridge
tvActress Kara Tointon on what to expect from Series 3
Voices
Winston Churchill, then prime minister, outside No 10 in June 1943
voicesA C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
News
i100
News
An asteroid is set to pass so close to Earth it will be visible with binoculars
news
News
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Credit Controller / Customer Service

£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...

Recruitment Genius: Tax Assistant

Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...

Recruitment Genius: Outbound Sales Executive - OTE £25,000

£16000 - £25000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Java Developer / J2EE Developer - Watford - £45,000 - £47,000

£45000 - £47000 per annum + bonus + benefits: Ashdown Group: Java Developer / ...

Day In a Page

Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea
America: Land of the free, home of the political dynasty

America: Land of the free, home of the political dynasty

These days in the US things are pretty much stuck where they are, both in politics and society at large, says Rupert Cornwell
A graphic history of US civil rights – in comic book form

A graphic history of US civil rights – in comic book form

A veteran of the Fifties campaigns is inspiring a new generation of activists
Winston Churchill: the enigma of a British hero

Winston Churchill: the enigma of a British hero

A C Benson called him 'a horrid little fellow', George Orwell would have shot him, but what a giant he seems now, says DJ Taylor
Growing mussels: Precious freshwater shellfish are thriving in a unique green project

Growing mussels

Precious freshwater shellfish are thriving in a unique green project