Friedman condemns the single currency as 'grave error'

Milton Friedman, the Nobel-prize-winning economist, yesterday lambasted the euro as a "grave error" as the currency suffered a sharp fall against the dollar.

Professor Friedman, a free-market monetarist and one of the few economists to have become a household name, said the single currency had given birth to a "turbulent period". "Rather than encouraging a united political system, the euro will create differences," he told Italy's Corriere della Sera newspaper

He gave the example of Ireland needing a tighter monetary policy at the moment while Italy needed looser policies. Mr Friedman said the 12-nation zone was in for a turbulent time because of the euro, but added that he believed the economy would survive the effects of a US recession.

His remarks came as the euro suffered its biggest drop in seven weeks against the dollar amid last-minute fears the European Central Bank will not cut interest rates this week. The euro dropped as much as 0.6 per cent to 90.86 US cents, from 91.41 in late New York trading on Friday, its largest percentage fall since July 5.

A large majority of independent economists polled last week believed the ECB would cut its benchmark minimum bid rate by 25 basis points to 4.25 per cent at Thursday's meeting, the first after a four-week summer break. But there are worries a strong set of money supply figures later today would prevent the ECB from ordering a rate cut without sacrificing its credibility.

Economists argue that ECB council members will face a whole range of indicators speaking in favour of a rate cut. Figures on Friday showed an unexpected fall in both French inflation and German industrial and import inflation. Earlier in the week it was confirmed Germany, Europe's largest economy, showed zero growth in the second quarter.

Also, the euro has risen against the dollar over the last few weeks, a move that will quell inflation by cutting import prices and restricting demand for exports.

Jose Luis Alzola, a European economist at Schroder Salomon Smith Barney, said: "Conditions now appear in place for another round of monetary easing which should come as early as this week." But he said a jump in M3 money supply or a rebound in credit growth were the main obstacles to a near-term rate cut.