Single currency 'will create jobs'

The single European currency could help to create up to a million jobs within a decade, contrary to fears expressed by the Governor of the Bank of England, according to new research.

Stable exchange rates and lower government budget deficits under the euro would allow interest rates to fall.

This would benefit the UK more than any other member state because its economy is far more sensitive to changes in interest rates, claim economists from the independent National Institute of Economic and Social Research.

Writing in New Economy, the journal of the left-leaning Institute for Public Policy Research, researchers Ray Barrell and Nigel Pain estimate that the UK would gain the most from monetary union.

They reject the idea that staying out and being able to run a bigger government deficit will be more expansionary. "An increase in government investment, financed by borrowing, is likely to raise real interest rates and, in turn, decrease employment, eventually offsetting the increase in jobs generated by the extra spending," they claim.

The new research follows an apparent warming to the single currency by Labour Party spokesmen in the run-up to the party's launch today of its European agenda.

Andrew Smith, shadow chief secretary to the Treasury, said last week that staying out of European monetary union could involve "substantial costs to the United Kingdom ... including the effect on jobs, investment, trade and the City."

The shadow chancellor, Gordon Brown, has also spoken of the need for a constructive approach to Europe and monetary union in recent speeches in Paris and Bonn.

The research, based on a computer model of the European economies, finds two routes for reduced interest rates under monetary union. One is the cut in government borrowing required by the Maastricht Treaty. The other is the fact that under a single currency the German Bundesbank would not in effect set European interest rate levels alone.

They find that a 1 per cent cut in total government borrowing would eventually, on a cautious estimate, bring real interest rates down by 0.3 per cent, cutting unemployment by 0.6 per cent or around a million.

Concerns expressed by many that government efforts to meet the deficit target - described by Eddie George, Governor of the Bank of England, as a "sprint for the finish" - risk recession and higher unemployment are at most a short-term worry, the authors argue. The UK will be better off if everyone tightens their policy because we benefit more from lower interest rates," Mr Barrell said.

High unemployment in Europe is more due to the increase in interest rates since the late 1970s than the usual suspects such as generous benefits, trade union power or Third World trade, according to the paper.