Outlook: Euroland

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The Independent Online
IT IS just one thing after another for the euro. An almighty row from day one between the German finance minister and the European Central Bank. The outbreak of war on the Continent. And the economy starts to misbehave too - the European Commission yesterday joined the list of those downgrading their growth forecasts for Euroland.

But these may be as nothing compared to the political difficulties presented by gathering 11 different welfare states under a single currency. A series of research papers presented at the annual conference of the Royal Economic Society yesterday underlined the potential for trouble. The first hot potato is the is the pressure for fiscal transfers, of which social spending forms a large part, between countries in the single currency area.

The conventional wisdom is that social security will remain very much in the hands of individual member states. Even more than taxation, it is seen as a national matter. But this is likely to prove unsustainable. Just as the US Federal Government transfers money between states, transfers within Europe will eventually form one of the mechanisms for making the single currency work well for a collection of differing economies. These transfers are likely to become a Brussels matter. Not only does social security spending forming 28 per cent of GDP on average, it is also a key demand management tool, rising in bad times and falling in good times. A country doing well can help out one doing badly if welfare spending can be financed across borders.

The second issue is the increased transparency created by the single currency. This will apply not just to consumer prices but also to living standards. People will easily be able to compare their level of benefits or, crucially, pensions. There is likely to be pressure to level up. It could be disastrous given the looming pensions burden in many Continental countries where pensions are both generous and largely unfunded.

The debate is one that policymakers chose to ignore in the run up to the launch of the single currency. Neither the likelihood of bigger budget transfers nor the need for pension reform was likely to win European hearts and minds.

With the euro's current troubles the discussion is hardly likely to start now. But it will in the end force itself to the attention of even the biggest ostriches in Emu.