EU warned of jobs chaos under single currency

Sunday Times 98-04-26 by Peter Conradi

THE European single currency could lead to a vicious circle of rising unemployment, barriers to free trade and dangerous political tension between member states, according to a study commissioned by the German government.

The 200-page report, released as Tony Blair prepares to chair a summit in Brussels this week to launch European monetary union (Emu), was compiled by economists at the prestigious Institute of World Economy in Kiel, one of the "wise men" institutions which has monitored the German economy in the post-war period.

The Kiel economists warn that the failure of many countries to reform their rigid employment rules - which make it hard to hire and fire staff - could lead to serious problems under the single currency.

It adds that high unemployment could bring demands for more state regulation and protectionist measures, making Emu countries less competitive. Those in southern Europe would also expect larger subsidies at the expense of those in the north.

"Problems on the labour market could reach such a scale that some countries might want to go back to national currencies," the economists warn. "But since the treaty does not give the possibility of secession, this could lead to serious political tensions."

Under the single currency, which will come into effect in January with the changeover to euro notes and coins due to occur by the middle of 2002, interest rates will be set by the new Euroepan central bank and participating countries will be deprived of the chance of devaluation to get out of economic difficulties.

The May 1-3 Brussels summit will confirm that Emu will go ahead on January 1, 1999, with 11 of the 15 European Union states as founder members; only Britain, Denmark, Sweden and Greece will be left outside. Government leaders will fix irrevocable exchange rates between participating states.

Overwhelming votes by the French and German parliaments last week in favour of Emu dispersed doubts that it would proceed on schedule. This was despite dissent in France among both the communists and the right-wing Gaullists, and German polls showing opposition running at more than 60%.

The European commission argues that the benefits of the euro in reducing uncertainty and exchange costs will more than outweigh the problems. In private, however, many officials express concern about a lack of convergence between economies.

"Talking to people at the commission is like being in a communist state before the Berlin Wall came down," said Bernard Connolly, a senior British economist dismissed from the commission in 1995 after writing a book highly critical of Emu. "If you get people on their own they admit to misgivings, but with colleagues they feel obliged to toe the line."

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