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Tuesday, 12 June, 2001, 17:06 GMT 18:06 UK
George rules out early euro entry
Sir Edward worries about the exchange rate
The governor of the Bank of England, Sir Edward George, has told the BBC that it would be "very difficult" for the pound to join the single currency at the current exchange rate.

Speaking to BBC News 24's new Business Today programme, Sir Edward said that the current level of the pound was "a real obstacle to early entry into the euro".

He said sterling's value needed to be "signficantly lower" than the current level of 3.15 to 3.20 Deutschmarks to the pound.

The simplistic view that you just cut interest rates and that will soften the exchange rate - that's clearly not true, at least in the short run

Sir Edward George
In recent days the pound has fallen, especially against the dollar, on the belief that with its landslide victory the new government may press for an early referendum on the euro.

But the governor cautioned that there was little chance the Bank of England could help force down the value of the pound without jeopardising its target of keeping inflation under control.

He said the "simplistic" view that "you just cut interest rates and that will soften the exchange rate - that's clearly not true, at least in the short run".

His comments come just days after Tony Blair reshuffled his Cabinet, sidelining several prominent pro-Europeans, including the former foreign secretay, Robin Cook.

The government has not made the exchange rate one of its five economic tests before recommending euro membership, but most observers agree that several tests would be more difficult to meet at the current exchange rate.

Inflationary threat

Speaking on the day when UK inflation reached a two-year high, Sir Edward highlighted the risks to the UK economy from a sharp drop in the value of the pound.

A weakening pound helps UK exporters, but at the same time makes imported goods more expensive.

The governor warned that a general decline would boost inflationary pressures, and could force the Bank of England to raise interest rates - increasing the gap between UK and eurozone rates and making joining monetary union even more difficult.

Sir Edward said the only way out of the dilemma was if the euro strengthened against the dollar - then the pound might be able to fall against the euro while also strengthening against the dollar.

But he added that no one was sure when the euro would recover, or why it was so weak - despite the strong economic fundamentals of the eurozone.

The bank governor - who is known as a mild eurosceptic - praised the European Central Bank for its management of the eurozone economy, with inflation in Europe now moving towards its target rate, while growth was above trend and unemployment was falling.

But he said the UK was right not to join the euro when it was launched, because the UK economy was growing much faster than the rest of Europe at that time.

The full interview will be broadcast at 2030 BST on BBC News 24's Business Today programme.

The BBC's Jenny Scott
"The lower pound is good news for... lots of manufacturers"
Rodney Leach, chairman of Business For Sterling
"There is firm opposition to the euro"

Bank of England Govenor Edward GeorgeBusiness Today
Talks to Bank of England boss Sir Edward George
AUDIO/VIDEO  real 56k
See also:

10 May 01 | Business
UK trims rates 0.25%
12 Jun 01 | Business
UK inflation hits two-year high
12 Jun 01 | Business
Pound plunges against US dollar
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