Eddie George warns on EMU suitability of France and Italy

The Governor of the Bank of England yesterday voiced 'serious doubts' about whether France and Italy should be allowed to join European Monetary Union. His warning came as the European Commission urged Britain to set a clear timetable for signing up to the single currency. Diane Coyle, Economics Editor, and Katherine Butler listened to the arguments.

Eddie George, Governor of the Bank of England, said high levels of unemployment in some EU countries threw the economic sustainability of the single currency into doubt.

"Wide divergences in unemployment rates pose a real question as the sustainability in the absence of much more flexibility in labour markets in Europe," he said, speaking before the Treasury Select Committee yesterday.

Pressed as to whether all 11 countries expected to join in the first wave should be allowed to, the Governor said: "I'm saying I have reservations about that." And asked specifically whether France, Italy and Spain, all with high jobless rates, should qualify he said: "I have serious doubts about it; but that's a judgement the heads of state will have to make when they meet in May."

If a ''wide'' EMU went ahead, Mr George said he expected there would be pressures for taxpayers in one member state to subsidise others in order to relieve unemployment. And there could also be pressure for restrictions on trade with countries both outside the EU and inside.

"The more countries you have, the greater the risk of this sort of thing happening," the Governor said. "There will be a great temptation for people to seek short-term solutions, to seek to ease the unemployment problems with short-term palliatives."

These would not solve the underlying structural problems, but, the Governor noted: "The unemployed don't care whether they are unemployed for structural reasons or for cyclical reasons. They just want a job."

Mr George has often expressed his concerns about whether the formal requirements for membership guaranteed genuine economic convergence, especially in the jobs market. But he was unusually outspoken yesterday in expressing the view that certain countries should not be allowed to go ahead.

However, Mr George firmly denied the charge of Euroscepticism. "In principle I'm not against the thing at all. I'm very pro-Europe. I'm pragmatic about the single currency."

Some MPs on the Committee were so staggered by the Governor's forthrightness they inferred he must be demob happy, and not about to be reappointed to a second term by Gordon Brown. But the expectation is that the Chancellor will keep Mr George in the job, with an announcement likely in the next week or so. Treasury sources painted his responses as the natural caution of a central banker.

Brussels turned up the heat on Britain over the single currency last night, after Mr George spoke, warning of serious political and economic consequences if the UK stays out of monetary union.

Jacques Santer, the European Commission President, used a lecture at the Guildhall in London to remind Tony Blair that his stated desire to become one of the EU's leaders will come to nothing if Britain remains aloof from EMU. "Long-term aspirations to shape the European Union," he said, "will not be helped if the United Kingdom remains outside the Euro zone for long."

In a separate speech, also delivered to a British audience at Brunel University last night, Sir Leon Brittan, the Commission's vice-president, went even further to urge a clear timetable for Britain's entry to EMU by at least 2002 when euro notes and coins enter circulation.

"Waiting and seeing may or may not have its political attractions but it is not a cost-free option," he warned.

Last night's speeches mark the start of a sustained effort by the Commission to pressurise the Government into a definite timetable for Britain's membership of EMU. Next week the monetary affairs commissioner Yves Thibault de Silguy will take up the running when he travels to London for talks with the Prime Minister and Chancellor.

In his comments, Mr George stressed the importance for the UK of continuing with practical steps to prepare for the euro, saying the Chancellor's working party would be publishing within the next year a national "changeover plan".

Giles Radice, chairman of the Treasury Committee, told Mr George that it proposed to hold confirmation hearings for future appointees to the Bank of England's Monetary Policy Committee. Although an attempt to incorporate this formally into the Bank of England Bill failed, Select Committees have wide powers to call witnesses.