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Thursday, March 19, 1998 Published at 16:02 GMT


Special Report

Emu: the disadvantages

Joining EMU may not be all good news

Eleven out of the 15 European Union countries will be in the first wave of participants in European monetary union (Emu).

They are expected to enjoy a number of economic benefits, including currency stability and lower interest rates.

But the advantages and disadvantages of joining Emu will vary from country to country, and are difficult to predict. Within the EU, each member state has its own financial system; the introduction of the Euro will make a different impact on each country's economcy.

At the same time, the EU's economies are not in perfect step; one monetary policy will not be suited for all countries.

Sceptics say that because of this, Emu membership will have serious disadvantages.

  • Fear of recession

    If governments were obliged, through a stability pact, to keep to the Maastricht criteria for perpetuity, no matter what their individual economic circumstances dictate, some countries may find that they are unable to combat recession by loosening their fiscal stance.

    Members would be unable to devalue in order to boost exports, to borrow more to boost job creation or to cut taxes when they see fit because of the public deficit criterion.

    However, the Maastricht Treaty allows for aid packages for euro members whose economy has run into serious trouble.

  • Differing economic cycles

    All the EU countries have different economic cycles, or are at different stages in the cycle between boom and recession.

    The UK economy, for example, is currently growing reasonably well, while Germany is having problems. This is the reverse of the situation in 1990.

    Critics of Emu say that the creation of a single currency will abolish the policy option to set interest rates separately at the level appropriate for each country .

  • Language difficulties

    Experts warn that monetary union can only be a success if the whole area covered by the single currency has the same legal framework (taxation, labour laws etc) and a labour force which is highly mobile.

    They say that monetary union works in the United States because the labour market is mobile, helped by the common language and portability of pensions etc. across a large geographical area. In contrast, 15 separate countries with widely differing economic performances and different languages have never attempted such a project before.

    Language in Europe is a huge barrier to labour force mobility. This may lead to pockets of deeply depressed areas in which people cannot find work, while other areas have a flourishing, high-wage economy.

    While the EU's cohesion funds attempt to address this, there are still great differences across the Union in economic performance.

  • Loss of sovereignty

    Loss of national sovereignty is the most often mentioned disadvantage of monetary union.

    The transfer of money and fiscal competencies from national to community level, would mean economically strong and stable countries would have to co-operate in the field of economic policy with other, weaker, countries, which are more tolerant to higher inflation.

    Some politicians, especially in the UK, warn that the introduction of a single currency could eventually lead to the end of the nation state.

  • Cost

    The one-off cost of introducing the single currency will be significant.

    The British Retailing Consortium estimates that British retailers will have to pay between £1.7 billion and £3.5 billion to make the necessary changes .

    Such changes include educating customers, changing labels, training staff, changing computer software and adjusting tills.





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