THE creation of the euro would establish a substantial rival to the yen and the dollar and be a force for currency stability, the European Commission said yesterday in an upbeat assessment of the external role of the currency on world markets.

In a report issued to coincide with its spring forecasts, the Commission pointed out that the combined economic weight of the EU 15 would match that of the US and exceed Japan - in 1996 the EU represented 39 per cent of the GDP of the OECD countries, the US 33 per cent, and Japan 20 per cent.

The result would be the creation of a huge single financial market in which national bonds would be virtually interchangeable, the Commission said.

Europe should also be considerably less vulnerable to currency fluctuations as the 30 per cent of European GDP involved in exports at present would be reduced to 10 per cent when internal EU trade was no longer denominated in separate currencies.

The creation of the euro is also expected by the Commission to continue the gradual erosion of the position of the dollar as the main vehicle for international trade.

Even today, 30 per cent of world trade would be denominated in euros if its external use was simply equivalent to the deutschmark.

And the trend towards increased portfolio holdings in European currencies - from 13 to 37 per cent of world savings between 1981 and 1995 - was also likely to rise, the Commission argued.

The report also predicted that the euro would not have an abrupt effect on exchange rates as the countries participating would have sound convergent economies and any sell off by central banks of excessive reserves was likely to be managed carefully.

The report urged a debate on the vexed issue of representation of the Union in such international economic forums as the G7 and the IMF.