Britain has failed to converge with the eurozone, say Bank chiefs

By Philip Thornton
Wednesday 11 December 2002 01:00

Sir Edward George, the Governor of the Bank of England, and his chosen successor, Mervyn King, last night hinted that they believed the UK had not converged with the eurozone, just six months ahead of the Government's ruling on whether the UK has passed the five economic tests for membership of the single currency.

The two central bankers said it was no surprise that interest rates had not converged over the last five years given the current state of the two economies.

Asked by a House of Lords committee whether they were surprised by the lack of convergence of interest rates, Sir Edward said this would only be driven by economic convergence. "What we have in the eurozone is substantial weakness, in the German economy in particular," he said. "It has an impact on the whole of the eurozone economy which is much more pronounced than the situation here where we have had a pick-up."

Mr King said the divergence was linked in part to the recent sharp move in the exchange rate, which he said could persist.

He also cast doubt on the Government's public finances forecast, just a day after the International Monetary Fund warned that the Treasury was being too optimistic.

"One of the problems is that clearly some of the shortfall in tax revenues is associated with the financial markets and the profits of financial companies and it is very difficult to be confident that when output picks up then the financial markets and the profits of companies will pick up," Mr King said.

Earlier, Gus O'Donnell, the most senior civil servant at the Treasury, surprised MPs by saying that the Chancellor's forecasts for economic recovery could come apart if there was a collapse in the overheated housing market. He told the Treasury Select Committee the current rate of growth in property prices was "unsustainable" and that the market would at some point have to cool down.

Meanwhile, Sir Edward hardened the language of his warning over public-sector pay demands, saying they could ultimately trigger higher interest rates and unemployment.

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