Bank of England chief Sir Edward George warned yesterday that Britain would face an interest rate "risk" if it joined the euro zone, but added there were advantages to signing up to the single currency as well. Sir Edward said the single euro-zone interest rate that would be foisted on Britain if it joined the euro was a disadvantage.
He also said that the freedom to manoeuvre that the Bank of England has enjoyed had been "a factor" in protecting Britain from the ravages of the current global economic slowdown.
But he said there were advantages to joining the euro zone as well. "I always say that there are pros and cons," Sir Edward said. "The pros being the nominal exchange rate stability and the much broader financial marketplace that we would be involved with which would mean lower margins between lenders and borrowers.
"The con is the potential risk of the one-size-fits-all monetary policy," he added. Britain has opted to stay out of the euro zone for now, with the government promising a national referendum on the issue only if five economic tests of convergence are passed. Analysts say the tests are highly subjective.
Sir Edward said one of Britain's main problems in joining the euro was the high level of sterling. Most economists agree that the current value of sterling is far too high to be locked into the euro system. The only way to overcome this, Sir Edward said, would be for the euro to strengthen, after remaining "puzzlingly" weak in its first three years of trading.
Sir Edward said he was concerned by the current economic slowdown, but added that 2002 should provide the first green shoots of recovery. "I would be very surprised if, by this time next year, we weren't in a fairly clear recovery phase in terms of the global economy and that would be very helpful," he told BBC radio.
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