Still question marks over euro’s effect on economy, says study

Date: 30/01/03

By Peter Chapman

THE economies of the 12 countries using the euro are likely to have performed in exactly the same way had they clung on to their former currencies, economists revealed this week

The finding, based on the eurozone's economic performance since 1999 when the currency was first used by financial markets, comes in an annual report on Europe's economy by consulting and accounting giant PricewaterhouseCoopers (PwC).

It follows claims by pro-euro politicians and economists, both at the time of the euro launch and since, that the single currency would have a significant positive effect on economic performance by removing the uncertainty caused by currency swings and cutting foreign exchange costs.

"The assessment finds that there is little evidence as yet that the launch has boosted Euroland economic performance since 1999," said John Hawksworth, PwC's head of macroeconomics.

The report states that economies have performed "broadly in line with historic trends and international comparitors".

"On the other hand," adds Hawksworth, "there is no clear evidence yet of [the euro] having had any significant adverse impact on Euroland economic performance."

Elsewhere in the report, the PwC economists predict growth in Germany, France and Italy to remain low in 2003 - although they say "outright recession" in these countries could be avoided if monetary and fiscal policy is not kept too tight.

France is expected to record the best performance of the three, with growth at around 1.5 - but the country's budget deficit is predicted to run close to the 3 ceiling stipulated by the EU's Stability and Growth Pact.

PwC said it expects Germany to grow by "around 1", with a deficit above 3 throughout the year. The Italian economy, meanwhile, is forecast to grow by around 1.35. But, PwC warns, its budget deficit could approach 3 next year.

If EU budget watchdogs interpret the Stability and Growth Pact too tightly the situation could be made even worse, PwC warns.

This would be "counterproductive", it claims, bringing the risk of "a double-dip recession" if fiscal policy is tightened before economic recovery is secure.

The Frankfurt-based European Central Bank must "stand ready to cut interest rates further if there are any signs that the economy is stalling", the economists add.

Germany this week modified its own predictions for its budget deficit and economic growth in 2003. It said it expected growth of only 1 instead of an earlier estimate of 1.5.

Economy and Labour Minister Wolfgang Clement said this would mean the deficit would hit 2.85 of national income instead of 2.75.

The economies of the 12 countries using the euro are likely to have performed in exactly the same way had they clung on to their former currencies, according to a report on Europe's economy by consulting and accounting firm PricewaterhouseCoopers (PwC).