UK economist warns on EMU difficulties

THE European Monetary Union project is a "huge leap in the dark" that would bring severe economic difficulties for European economies, according to Citibank economist Mr Neil MacKinnon.

Speaking in Dublin yesterday, Mr MacKinnon warned that EMU would cause even greater currency volatility and stifle economic growth in states such as Ireland. It might also prompt the flight of investment capital within the EU, with international investors shifting their focus to states which offered the lowest cost base for manufacturing and the lowest taxes, he said.

Mr MacKinnon, who is based in Citibank in London, said the EMU debate had been very one sided and had largely ignored the economic implications of the move on EU member states.

"It is remarkable that there is such an attraction to a project where the economic implications for EU states are not so clear cut. So far, there has been no emphasis on jobs and economic growth and that's what really matters."

Mr MacKinnon said that as EMU was essentially a political project, there was a powerful incentive that it happen on time, regardless of the economic consequences. He insisted, however, that in terms of economic benefits there was nothing positive to be gained from EMU.

"States such as Ireland will be backing themselves into a fiscal strait jacket which could make economic conditions worse rather than better" he said.

By joining EMU, Mr MacKinnon said European economies were effectively surrendering control of their national economies to a European central bank, leaving them little scope to tackle domestic problems, such as unemployment.

This, MacKinnon warned was the "riskiest" way of running an economy.

"European economies will be run by central bankers in Europe. But if the 1992 currency crisis taught us anything, it is that in times of trouble national central banks need to be able to use all of the instruments at their disposal including opting to devalue the currency or hike interest rates, to break the log jam."

In the short term, he predicted that sterling would become increasingly volatile in the run up to the British general election. Irish interest rates could come under some pressure before year end, he said, but any increase in rates was likely to be very modest, adding probably no more than a quarter of a percentage point to bank and building society rates.