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DAVID FROST: Three and a half years ago Eddie George had a tumultuous time, the Bank of England of which he was President was made independent but many of his old functions were stripped away. Last week was pretty tumultuous too with one dip of the sword the Governor became, Sir, Edward or Eddie? Top of the morning which, which are we using today?

EDDIE GEORGE: Formally it's Sir Edward but I hope you'd call me Eddie David.

DAVID FROST: Oh very good and, and at home your wife calls you Edward?

EDDIE GEORGE: Yes she does.

DAVID FROST: So that's, so that's, well that's clarified it. Thank you very much indeed, we've clarified that vital issue. There's so much to talk about, why do you think the Euro has been so weak since it started?

EDDIE GEORGE: Oh I think that's a very interesting question, I think a lot of the commentary is really misguided. If you look at the Eurozone in its own terms actually they've done extremely well. You've got the economy growing above trends and that's likely to continue, you've got unemployment finally coming down from cruelly high levels but nevertheless coming down for the first time in a long time, you've got the external position is pretty well in balance and you've got low underlying inflation, one and a half per cent, so just look at the Eurozone in its own terms and they've done a pretty good job and I think a lot of the criticisms are from people who have their own agendas. The reason that it's been weak has actually been less to do with what's happening in the Eurozone than with the magnetic effect of higher productivity growth and strong economic growth in the United States sucking capital out from the whole of the rest of the world, long-term capital, mergers and acquisitions, equities, corporate bond finance. And in those circumstances it's been extremely difficult, you can say that it's also to do with weaknesses on the supply side of the Eurozone economy, very little to do with the European Central Bank, that situation, but frankly I think it's terribly important that one should understand the factors because otherwise you'll get the policy responses wrong.

DAVID FROST: But in that case what would have been different, if we had, if we had joined the Euro on day one, January 1st, 1999, how would our life, our economic financial life have been different from then until now, if we'd been in it what effect would it have on us?

EDDIE GEORGE: Well we were in a different situation, we're a different stage of the cycle from the Eurozone, we'd actually already had six or seven years of pretty steady growth, we were already operating pretty close to capacity, that wasn't true in the Eurozone. So that it would have been I think uncomfortable for us because we would have had not just lower interest rates, but we would have had a lower exchange rate if we'd been locked in to the Euro, lower overall exchange rate, and the effect of that would have been a very strongly expansionary British economy when we were already operating quite close to capacity¿

DAVID FROST: So inflation would have rocketed?

EDDIE GEORGE: It would, well I don't know about rocketed but it would have certainly accelerated and people look at what's happened in Ireland as an example of that, I'm not sure you can draw a direct comparison but that's the sort of thing that could have happened here?

DAVID FROST: Right and interest rates would have been higher too, would they?

EDDIE GEORGE: Well they couldn't have been because the Eurozone interest rate would have applied here and of course the Eurozone¿

DAVID FROST: That would take us down?

EDDIE GEORGE: Would have meant that we'd have had lower interest rates and a lower exchange rate and we would have had to have probably tighter fiscal policy, we would have had to have a very understanding labour market. Actually the labour market's performed pretty well but it would have taken more of the strain still.

DAVID FROST: The other thing is your job would have been less wouldn't it, I mean when this happens if it happens the job of the Governor of the Bank of England will be half what it was before?

EDDIE GEORGE: Well in a sense it will be going back to where we were before we were given our independent role to implement monetary policy, at that time we were participating in the decision, advising in the, if we were to join the Euro then the Governor would be a member of the decision-taking body in relation to monetary policy in the Eurozone, so yes it would be different, I have to tell you it's not a big factor in one's assessment of whether this is a good or a bad thing.

DAVID FROST: Are we, compared to January 1st, 1999, on the five famous tests and so on, are we moving closer to a point where a decision could be taken that was yes?

EDDIE GEORGE: Well I think the¿

DAVID FROST: Could be yes?

EDDIE GEORGE: ¿weakness of the Euro is a real complication because I don't think anybody believes that we could sensibly lock into the Euro at the kind of exchange rate we've had over the recent period. The Euro is beginning to recover hopefully because I think that would be a good thing for the whole world economy, but also be very helpful for the British economy. But at the kind of current level, the level at which we've been recently, it's very difficult to think we could lock in at that level, if we had then to lock in at a much lower level and reduce interest rates in order to conform with the Eurozone interest rate pattern we would be in the same situation as we would have been if we'd joined from the start. Now if the Euro recovers and we have a more sustainable rate against the Euro for sterling then that tension will go away and then I think the five tests can be applied.

DAVID FROST: And staying, staying out at the moment, how, how much effect does that have, the doomsayers who said by staying out that the City of London might contract, might suffer and all of that, have we suffered at all from being out of it?

EDDIE GEORGE: I think it's very difficult to argue that we've suffered up until now, of course it's also very difficult to demonstrate that if this were to continue we wouldn't at some point begin to suffer, that's, you know, trying to prove a negative and say I think it would be strong to say the City is not an issue in this thing and indeed it's one of the five tests.

DAVID FROST: And in fact that some day there probably will be a single currency in which Britain plays its part some day?

EDDIE GEORGE: Well that's a political decision and not one for me.

DAVID FROST: But¿but you said that economically it would be damaging after a time?

EDDIE GEORGE: No it could be, I mean you can't prove that it wouldn't be is my position, but you know I'm not sure that you can prove that it would be and the experience so far has been very positive for the City.

DAVID FROST: Positive so far. And in terms of the current state of the British economy and the possibility obviously of there being some more cuts of one sort or another, or increased spending in the next budget and so on, how, how do you feel the British economy is poised at the moment?

EDDIE GEORGE: Well the overall macro-economy is currently in very good shape, we've had this very long period of steady growth, we've got employment which is the highest it's ever been, the numbers in work, unemployment is as low across the United Kingdom as a whole as it's been for 25 years. It's as low as it's been in every region of the United Kingdom for 20 years, I mean more or less, so the macro-economic level, that's a pretty good picture and the kind of central expectation is that that will be sustained over the next couple of years which is our forecasting horizon. The problem has been imbalance with some sectors doing very well and other sectors under pressure. Those sectors under pressure, that pressure has been aggravated by the weakness of sterling against the Euro and there's sadly not a great deal that we can do about that, we either continue to direct ourselves at the overall macro-economic situation or we try to shelter some of the adversely affected sectors by paying more attention to the exchange rate than we already do in which case we could put at risk the stability in the economy as well.

DAVID FROST: What, what do you see Eddie, as the position in terms of America, some of the Bush advisors, one said that America might be on the brink of some sort of recession, Alan Greenspan this week said enough to be reassuring about a soft landing, that the markets responded warmly and so on. Do you feel, given the fact that if America sneezes we catch a cold and all those things, do you feel that we can expect America to continue on its current course, perhaps a bit, little more slowly, or do you think the fears are justified?

EDDIE GEORGE: Well it's the biggest question for the whole of the international economy including ourselves I think, the United States economy had to slow down, if it hadn't begun to slow down then I think we would be looking at a bigger problem as inflationary pressures built up, we would be looking at a bigger problem further down the track so it's a good thing that the US economy is slowing down. The question is one of degree and it's a question of degree, what is the sustainable rate for the United States economy, it's clearly higher than it has been in the past because of the productivity improvement in the United States economy, how long is that persisting? And it's possible to have views and different views about that, I think Alan's view is that the productivity improvement spreading through the US economy has still got quite a way to go and therefore the sustainable rate is significantly above where it was. And then he has to keep demand in line with that sustainable rate, we have seen a bit of a slowdown, I'm not greatly concerned that it's excessive at this stage but clearly one has to be sensitive to it and monitor the data as it comes in on both the supply side and the demand side and I think broadly speaking that's Alan Greenspan's position too. It is¿

DAVID FROST: Cautious optimism?

EDDIE GEORGE: Cautious optimism but central bankers always look at the risks and I think the risk of the economy growing too strongly was greater three, six months ago, and now people have seen the change and there's a great tendency you know to exaggerate this thing and to move from the need for slowdown to downturn to recession to meltdown. I mean that happens very quickly I think. DAVID FROST: Absolutely and¿

EDDIE GEORGE: ¿market perception¿ DAVID FROST: In headlines too, words like doom and gloom are very short and convenient?

EDDIE GEORGE: We're not in that situation now.

DAVID FROST: No, good to know that. END

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