Bank of England governor says Euro zone 'tearing itself apart'

Thu, May 17, 2012, 01:00

THE EURO ZONE is “tearing itself apart without any obvious solution” emerging for the problems in the single currency, the governor of the Bank of England, Mervyn King, has said, as he warned that the crisis is hitting the UK’s own economy.

Presenting the bank’s quarterly inflation predictions, Mr King made it clear that the UK economy will now not return to its pre-2008 size before 2014, with little or no growth expected this year.

“We are navigating through turbulent waters, with the risk of a storm heading our way from the continent. We don’t know when the storm clouds will move away,” said the governor, who has been at the helm of the Bank of England throughout the crisis.

“We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country’s history, the biggest fiscal deficit in our peacetime history and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution.”

Questioned about emergency planning for a collapse of the euro, Mr King said: “I don’t want to speculate in any great detail, I don’t want to fan the flames that are already seen in the euro area at present. Contingency plans are being discussed.”

Despite its pessimistic tones, the Bank of England’s forecasts are based on the euro zone ensuring “that the twin challenges facing the periphery countries of regaining competitiveness and reducing indebtedness are tackled in an orderly fashion”.

“Even so, growth in the euro area is likely to pick up only modestly, and to remain below pre-crisis average rates for some time.

“There are substantial uncertainties around that projection given the scale of the adjustments that are necessary.”

If an orderly solution is not found, the bank warns that “there is still a possibility that this process could involve a disorderly adjustment, resulting in sharply lower output in the euro area”.

This prospect is so bleak that the bank’s Monetary Policy Committee said there is “no meaningful way to quantify the size and likelihood of the most extreme possibilities associated with developments in the euro area”.

Saying that such an outcome is therefore “excluded” from its predictions, the MPC said it believes the possibility of such a crisis occurring will continue to weigh on the UK economy.

In its report, the Bank of England predicts that UK economic growth this year will reach no more than 0.8 per cent, before rising to 2 per cent next year.