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
Arts and Entertainment
The Doctor and Clara have their first real heart to heart since he regenerated in 'Deep Breath'
TV
Arts and Entertainment
James Hewitt has firmly denied being Harry’s father
arts + ents
Arts and Entertainment
Jamie Oliver
filmTV chef Jamie Oliver turned down role in The Hobbit
News
The official police photograph of Dustin Diamond taken after he was arrested in Wisconsin
peopleDownfall of the TV star charged with bar stabbing
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Sport
Ashley Barnes of Burnley scores their second goal
footballMan City vs Burnley match report
News
news
News
Sir James Dyson: 'Students must be inspired to take up the challenge of engineering'
i100
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
Life and Style
Apple showed no sign of losing its talent for product launches with the new, slightly larger iPhone 6 making headlines
techSecurity breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
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

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

A timely reminder of the bloody anniversary we all forgot

A timely reminder of the bloody anniversary we all forgot

Who remembers that this week we enter the 150th anniversary year of the end of the American Civil War, asks Robert Fisk
Homeless Veterans appeal: Former soldiers pay their respects to a friend who also served

Homeless Veterans appeal

Former soldiers pay their respects to a friend who also served
Downfall of Dustin 'Screech' Diamond, the 'Saved By The Bell' star charged with bar stabbing

Scarred by the bell

The downfall of the TV star charged with bar stabbing
Why 2014 was a year of technological let-downs

Why 2014 was a year of technological let-downs

Security breaches and overhyped start-ups dominated a year in which very little changed (save the size of your phone)
Cuba's golf revolution: But will the revolutionary nation take 'bourgeois' game to its heart?

Will revolutionary Cuba take 'bourgeois' golf to its heart?

Fidel Castro ridiculed the game – but now investment in leisure resort projects is welcome
The Locked Room Mysteries: As a new collection of the genre’s best is published, its editor Otto Penzler explains the rules of engagement

The Locked Room Mysteries

As a new collection of the genre’s best is published, its editor explains the rules of engagement
Amy Adams on playing painter Margaret Keane in Tim Burton's Big Eyes

How I made myself Keane

Amy Adams hadn’t wanted to take the role of artist Margaret Keane, because she’d had enough of playing victims. But then she had a daughter, and saw the painter in a new light
Ed Richards: Parting view of Ofcom chief. . . we hate jokes on the disabled

Parting view of Ofcom chief... we hate jokes on the disabled

Bad language once got TV viewers irate, inciting calls to broadcasting switchboards. But now there is a worse offender, says retiring head of the media watchdog, Ed Richards
A look back at fashion in 2014: Wear in review

Wear in review

A look back at fashion in 2014
Ian Herbert: My 10 hopes for sport in 2015. Might just one of them happen?

Ian Herbert: My 10 hopes for sport in 2015

Might just one of them happen?
War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?