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.