Sir Mervyn, the UK and the euro

Mervyn King Bank of England governor Sir Mervyn King's comments carry weight

It would be bad news for the UK if the eurozone crisis ends in a messy break-up but it is not the worst-case scenario. The worst-case scenario is that the crisis does not end at all.

That was one clear message from Sir Mervyn King's forceful remarks on the euro crisis today.

The governor often says it's not his place to tell other countries what they ought to do. Then he often goes ahead and does it.

He talked of the eurozone "tearing itself apart" in a crisis that shows little sign of being resolved - because, unlike the UK and US, they have not confronted the solvency problems at the heart of the crisis head-on.

The European Central Bank, he said, had performed "heroically" in buying time for the eurozone's governments. But that time "had not been used to reach lasting solutions".

He has said similar things before, often forcefully. But in today's febrile atmosphere, his words carry more weight.

The same applies to his careful, but pointed, confirmation that the UK authorities have indeed been drawing contingency plans for a country leaving the euro, "and have been for some considerable time".

How would a messy continuation of the crisis affect us?

As usual, the BoE's new forecasts for inflation and growth do not allow for the possibility of a euro break-up, which they consider to be truly "incalculable".

But they do include the impact of continued uncertainty about it - for example, the fact that fears about Europe continue to push of bank funding costs.

The Office for Budget Responsibility (OBR) has made the same judgment in its recent reports. When it comes to forecasting models, the impact of a euro break-up simply "will not compute".

But, as I suggested to the governor in my question at the press conference, it's not just that the effects are uncertain - it's also that they may run in different directions.

If the departure of Greece and, perhaps, a few others results in faster growth for those economies than they would on the current trajectory - over 10 years, say - then the net impact on the UK could actually be positive.

That would be even more likely, if the short-term mess resulting from a "Grexit" turned out to be containable, as many hope but none can confidently predict.

As the OBR noted last year, it is also possible that a Greek exit would push down the UK government's cost of borrowing even lower, due to safe haven flows into sterling. In other words, it could save the government money, though it's pretty clear that a further rise in sterling would not be good news for the economy overall.

None of this is to say that a Greek exit would be a good thing for the UK. But it is important, as ever to consider the alternative scenarios for Greece and the rest of the eurozone.

None of those bode very well for the UK either.

As Sir Mervyn was at pains to emphasise, this is not a simple matter of "in or out" - or even, in David Cameron's rather undiplomatic phrase, "make-up or break-up".

Whether the eurozone ends up with 17 members or none, the governor seemed to be saying, is actually much less important than how and when the long-term imbalances at the root of the crisis get resolved.

European policymakers, I suspect, will not rush to thank him for his kind and timely advice. If he wants to lecture them about "resolving" the region's long-term debt and competitiveness problems, they might reasonably add, it would be helpful if he could include some specifics.

How exactly, for example, does Sir Mervyn think you could agree to restructure the private debt that is causing so much trouble, in an era of 24-hour news and round-the-clock leaks?

The lesson at the heart of Sir Mervyn's lecture is a useful one for UK policymakers. They tend to think that the messy survival of the euro would always be better for the UK than messy euro exits.

That could very easily be wrong.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 137.

    Surely, given the outcome of recent elections across Europe, and the way some governments have been tying themselves in knots, a more realistic prospect is for Germany to leave the Euro?

  • rate this

    Comment number 136.

  • rate this

    Comment number 135.

    King keeps blaming the Eurozone for the UK's poor performance, yet it's my understanding that the UK has had the worst growth, unemployment and highest inflation of developing countries (including within Europe) over the last few years.

    What boggles me is the high inflation issue. I assume it's not demand-driven but rather a case of companies trying to increase margins now to stay competitive..?

  • rate this

    Comment number 134.

    Stephanie. Any chance you could do a piece on what economists have got right in the past 10 years or so? Why should we believe a thing they say. Are they actually just historians ... which in a business sense is as much use as the chocolate teapot. I do like chocolate however.

  • rate this

    Comment number 133.

    The language that Sir Mervyn was using in this press conference suggested to me that he is completely out of his depth in this job. Others posting here have been suggesting similar for some time.

    I now agree - he should do the decent thing and resign.

  • rate this

    Comment number 132.

    If people are not being affected by this crisis then concern or being worried by this crisis is pointless. Another statement by BOE King released yesterday had his touch of death on confidence and currency once again.It seems he is telling those who are aware to worry about our ability to control our economy!!!

  • rate this

    Comment number 131.

    ref. 64
    "Exchange controls and import tariffs should not be taboo. That each state achieves a trade balance is more vital than "free trade".

    What if your state doesn't produce anything to export?

    ref. Bl..Berry
    You should really try to trade that one trick pony in for a newer model.

  • rate this

    Comment number 130.

    King has one business objective - bring inflation down to 2%.

    neo-liberals are obsessed with micro-managing inflation, particularly in Germany, but if you concentrate on productive capacity & high employment to utilise it then inflation will largely look after itself.

  • rate this

    Comment number 129.

    Cameron & Kings speeches are purely for domestic consumption, if their policies fail, as they may well do, they want to blame the EU & to be able to point back & say we told you the EU might cause this to happen.

  • rate this

    Comment number 128.

    @93 @97
    We need to accept that in the EU we have to redistribute from rich to poor areas. We are happy to subsidise farmers all over the EU - what is so wrong about Greeks?

    good point, though many are not happy about it we accept massive financial transfer to agriculture to keep it viable in EU

    Economic blindness results from going to Harvard!

    Harvard is the neo-liberal Propagandaministerium

  • rate this

    Comment number 127.

    there are other ways and systems and ideas and as much as we like to think the free market reflects our intrinsic human nature ..any environment where greed is allowed to go unchecked as it does in the financial markets is bound to come a cropper...time to squeedgie our third eye to quote the great bill hicks and look at Ideas like TZM for inspiration..its really not hard to grasp!! time to evolve

  • rate this

    Comment number 126.

    King has one business objective - bring inflation down to 2%. He has ignored this and taken actions which have made the banks richer, damaged the pound and destroyed the savings of the most vulnerable. He can get away with it because our government is controlled by the banks. A member of the fat cat club softening the public up for pointing the finger elsewhere when disaster strikes.

  • rate this

    Comment number 125.

    Perhaps MK would like to watch this summary and tell us why it wont work...

  • rate this

    Comment number 124.

    We can't all be like Germany. Germany runs a huge surplus on current account. One country's surplus is another's deficit. We can't all be in surplus.

    When this was put to German Finance ministry, they said ah but all EZ countries could run permanent surpluses & non EZ countries deficits. Almost a declaration of economic world war
    (actually permanent surpluses are bad for economy.)

  • rate this

    Comment number 123.

    come on folks...aint it about time we finally admitted that this system just is not working...i mean even if we all escape unscathed from this latest drama how long till the next crisis comes round and then the next..not long methinks...isnt it about time we all just grew up and admitted that a global economic structure pretty much predicated solely on money and greed really is getting us nowhere?

  • rate this

    Comment number 122.

    The trio of Italian economists, Nuti, Passinetti & Garegnani, destroyed market economics theory
    They were kicked out of Cambridge by King's mentors.
    King himself traduced Nuti whilst at Birmingham Univerity.

    King & Greenspan caused the CRASH (as opposed to a smooth deflation) by interest rate hikes
    He's a frightened man, too weak & too imprisoned by his own past to embrace socialism

  • rate this

    Comment number 121.

    Glad you've come out of hiding Steph, but you're STILL hiding - behind the 'great and the good' who are either completely dishonest or have not a clue what's going on
    Still, I still promise to defend you when you hazard an opinion not born of the appalling nonsense that constitutes Cambridge economics.
    Start by READING some socialist economics, eg the destruction of Meade & Samuleson by Nuti etc

  • rate this

    Comment number 120.

    Cameron does want the euro to fail,he will portray it has his victory to the right off his party

  • rate this

    Comment number 119.

    Its almost as if Cameron & Co are willing Greece to fail. Millions of ordinary people in the UK can only look on and wonder what the hell is going on. What is the 'worse case' scenario? MK (BOE) has spoken of the eurozone "tearing itself apart", OBR says it "will not compute", Cameron says "make-up or break-up" The UK needs an agreed comprehensive strategy that can be used as a fall back plan.

  • rate this

    Comment number 118.

    When is King going to admit that the problem is irresponsible private capital.

    Grow a pair and take the finance industry into public ownership Merve, and sequester every penny of US slush money that leeches economic effort here
    And stop QE - except for homes, schools etc - real investments


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