Crisis mgmt hit by joining euro, UK Lords say

The government's ability to manage the economy in a crisis could be hamstrung if Britain joins the euro, a House of Lords committee warned today.
The government's ability to manage the economy in a crisis could be hamstrung if Britain joins the euro, a House of Lords committee warned today.

The cross-party European Union committee, made up of senior peers, said that while there were many economic advantages to membership of the single currency, the ability of the system to cope in a crisis was as yet unproven.

It said nations could find their hands tied by the stability and growth pact - the strict rules governing tax and spending intended to prevent individual states destabilising the whole Eurozone by too much borrowing.

There was a potential downside in having UK interest rates - the main weapon against inflation - set centrally for the whole of the Eurozone by the European Central Bank in Frankfurt, rather than by the Bank of England.

That meant the government would have to rely on fiscal policy - tax and spending - or achieving structural improvements, such as a more competitive labour market or higher productivity, to manage the economy.

However, the committee said the experience of Eurozone states was that the pace of structural change may have been moving too slowly, leading to sluggish growth and a slide in the value of the euro.There were also problems in relying on fiscal policy as the economic effects on changes in tax and spending tended to work through slowly.

Lord Tomlinson, the Labour peer who chairs the committee, said it was impossible to know how the Eurozone economy would cope in a crisis because it had been growing throughout the two years since the currency was launched.

"All the Eurozone governments from whom we received evidence assured us that the euro had been successful for them. Perhaps that was to be expected but the facts suggest that there have indeed been significant benefits for Eurozone member states," he said.

"We recognise that there are also dangers. It is possible that the 'one-size-fits-all' monetary (interest rate) policy will turn out not to fit all - that national governments will be hamstrung because they have lost the tools of devaluation and differential interest rates."

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