UK Treasury prepares for ‘economic armageddon’ if euro falls apart

Thursday, November 10, 2011
By Paul Martin

Bank of England helps draw up British contingency plans after European commission slashes growth forecasts

Patrick Wintour, David Gow and Nicholas Watt
Guardian.co.uk
Thursday 10 November 2011

The Treasury and Bank of England are making contingency plans for an “economic Armageddon” if the euro falls apart, business secretary Vince Cable said on Thursday as the European commission slashed its growth forecasts and predicted that the continent could be plunged back into recession next year.

With David Cameron warning that the moment of truth was approaching for the eurozone, ministers are resigned to a severe downgrade of UK growth and public finances when the Office for Budget Responsibility reports this month. Brussels officials said the outlook for the UK economy had deteriorated significantly throughout 2011 and its recovery was lagging rivals’.

The commission now expects the UK economy to expand just 0.7% this year, compared with a forecast of 1.7% in May. Growth for next year is forecast to be just 0.6%, a huge drop on the OBR spring forecast of 2.5 %. An increasingly impatient Cameron again urged the Germans to allow the European Central Bank (ECB) to “act now” and become lender of the last resort to save distressed euro-economies, seen by Britain as the only way to keep the euro from collapse and prevent a wider banking liquidity crisis.

His call came as fears rose that France could be next to be engulfed by the crisis. Brussels downgraded its forecasts for the eurozone’s second biggest economy, prompting a sharp rise in benchmark bond yields in France to 3.48% – almost double what Germany pays to borrow money.

Pressure on Italy, where bond yields this week breached the 7% danger level, eased after it appeared that former EU commissioner Mario Monti would be installed as prime minister by the weekend, while in Greece his fellow technocrat Lucas Papademos emerged as the leader of the country’s new coalition government after four days of talks.

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