Nobel economist calls euro an error

The European economy should be able to survive the effects of a US recession but the 12-nation euro zone could be in for a turbulent time because of the euro, Nobel prize-winning economist Prof Milton Friedman said yesterday.

In an interview with Italy's Corriere della Sera newspaper, Prof Friedman called the euro "a grave error" which could give birth to a turbulent period .

Rather than encouraging a united political system, the euro will create differences, Mr Friedman said.

He cited Ireland as an example of a country needing a tighter monetary policy at the moment while Italy needed looser policies.

If Germany, which is in difficulty, decides to adopt an easier monetary policy to boost its economy, tension will rise, he added, forecasting the main euro-related problems would be in Germany, France and Spain.

On European growth prospects, Prof Friedman was more positive. He said Japan and Europe had shown themselves to have good potential for autonomous growth and that that should help them weather a US recession.

"I believe the United States is already in recession. The fall in production and employment show that clearly", the free-market economist said.

"Whether or not we use the word 'recession' is just a question of semantics", he said. "With the heavy drop in growth we have seen for a while, I wouldn't be surprised if the third quarter figures showed negative growth."

Prof Friedman said the US should pull out of recession in 2002 but will have to keep an eye on inflation when it does.

The Federal Reserve has cut rates seven times this year, chopping three percentage points off the benchmark overnight lending rate since January.

It was the right policy in order to give the economy a push but in the long term it was too inflationary because in the last nine to 10 months money supply growth has risen from nine per cent to 10 per cent, he said.

Prof Friedman inspired central banks around the world with his arguments that inflation could be controlled through money supply - a policy keenly followed by former British Prime Minister Margaret Thatcher in the 1980s.

Prof Friedman, won the Nobel prize for economics in 1976.