Europe should set rates the UK way, says Sir Eddie

Sir Eddie George, the governor of the Bank of England, yesterday said Europe's struggling economies would be better off if the European Central Bank adopted Britain's system of setting interest rates.

Quizzed by MPs on the Treasury's select committee about the government's five tests for joining the euro, Sir Eddie gave a clear hint that he would like to see an overhaul of Europe's monetary policy arrangements before Britain enters the single currency.

Sir Eddie said while there was not much difference between the ECB's 2% inflation ceiling and Britain's 2.5% target, the Bank of England was able to be more proactive about warding off recession because the government regarded undershoots of the target as seriously as overshoots. Asked if the ECB should adopt this type of symmetrical target, Sir Eddie said: "I think it would help the process and would go against this risk of stagnation."

After coming under heavy criticism for not cutting rates fast enough in the face of sliding global growth, the ECB announced a review of its rate setting system. But observers say a shift to a British-style symmetrical target is unlikely to happen soon.

Sir Eddie admitted that the Bank of England's system was also open to criticism because there was a risk that it could be "too proactive" and trigger another bout of unsustainable house price inflation.

The governor also suggested the ECB was wrong in insisting on a strict interpretation of Europe's stability and growth pact, which sets a 3% limit on government borrowing.

"In an environment of weak demand, you must let the fiscal stabilisers operate and not have an artificial cut-off point," he said, adding that countries should not be punished now for failing to rein in borrowing when their economies were growing strongly.

Single currency enthusiasts seized on Sir Eddie's remarks to the effect that exchange rate was less of a barrier to entry than a year ago.

Sterling's recent slide on the foreign exchanges had made it less of an obstacle, the governor said, although he warned it was very difficult to decide the apprioriate rate. "Whether it has come down to a level which is acceptable, you are going to have to get the views of people exposed to the euro's exchange rate, you're going to have to do a lot of academic work," he said. "Heaven knows, it is a real art and will come to a lot of different answers."