George grows sceptical on currency timetable

Eddie George, the Governor of the Bank of England, said yesterday he had become more sceptical about whether the single European currency would go ahead on time because of the economic slowdown in Europe. "I am more doubtful now than I was a year ago," he told MPs on the House of Commons Treasury select committee.

But he added that there would be no technical difficulties preventing Britain taking part. The City of London would be trading in euros from 1 January 1999 whether Britain joined or not. "I am reasonably confident that we can be in a position to operating in euros whether we are in or out," he said.

Mr George also embellished his usual pragmatism on the single currency question by saying it was hard to see why Britain should stay out if it met the Maastricht criteria for entry and these were strictly applied. In those circumstances the UK would simply pay the penalty of higher interest rates without reaping any of the benefits of membership.

The Governor argued that Britain's decision on whether to join the single European currency would involve a difficult judgement about the costs and benefits. Staying out would leave Britain with higher interest rates than countries that took part. It might also hit inward investment.

However, he downplayed fears that the UK economy was too different in structure from Continental economies to give up an independent monetary policy. Preliminary Bank of England research suggested that the response of the UK economy to a change in interest rates was not very different from the response in Germany or France, despite huge differences in housing finance.

Instead, he emphasised the importance of rigorous application of the Maastricht convergence criteria. He added that they were probably not sufficient to ensure that the monetary union was sustainable.

Mr George said he would therefore favour a mechanism to enforce sound economic policies after entry into EMU, along the lines of the "stability pact" proposed by German finance minister, Theo Waigel.

He said the Maastricht criteria, especially those concerning government deficits and debt, were intended to prevent irreconcilable tensions emerging within the single currency. "It is important that they should be applied with some rigour," he said. If economies had not converged some parts of the EU could be stuck with high unemployment and few options for addressing it.

The Governor agreed there was a danger that some other countries might want to fudge the issue in order to meet the current timetable. "It is not possible at this distance to exclude this in the case where there is a very strong political determination to make it happen."

He repeated his earlier warning that there were risks in a "sprint for the finish". Taking action to reduce government budget deficits fast enough had raised the risk of weaker economic activity in France and Germany.

Comment, page 17