George says Britain may be safer outside the single currency

Eddie George, the Governor of the Bank of England, yesterday said the UK should only adopt a single European currency if it was going to be a "safe club to join". He added that Britain could survive outside European economic and monetary union and might be safer outside if the convergence criteria appeared unsustainable.

Appearing on Jimmy Young's programme on BBC Radio 2, Mr George also admitted that he had been wrong last year when he argued with the Chancellor of the Exchequer that interest rates should go up rather than down. The Governor conceded that this disagreement damaged his credibility with many people, since it became obvious afterwards that the Chancellor's downward movement in rates had been the correct one.

When asked if Britain could exist perfectly well outside EMU, Mr George said: "I believe so." He said the issue for the UK, when the time came, was "whether or not EMU is a safe club to join." Referring to "tension" between other EU countries, he added: "If those tensions looked serious, if the convergence criteria looked as if they would be unsustainable, then frankly I think we could easily conclude that we would be safer, less exposed to risks of having problems visited upon us by standing on one side."

He said that there were serious economic risks in pressing ahead with EMU when unemployment was so high in Europe. He also said that if it looked as though the tough EMU criteria on debt, budget deficits, inflation and exchange rates were not sustainable, then it would be in the UK's interest to stay outside.

Mr George was speaking as one of the Government's independent economic advisers warned that taxes would have to go up after the next election, or public spending be slashed, if Britain was to meet the Maastricht EMU criteria. After overshooting forecasts by about pounds 10bn last year, public borrowing in 1997/8 will remain well above the 3 per cent of GDP set by Maastricht, said Gavyn Davies, chief economist at the investment bank Goldman Sachs and one of the the Treasury's six "wise persons".

The main UK banks yesterday dented hopes of a rapid end to difficulties in the housing market, announcing that net mortgage lending in March, at pounds 632m, was lower than the previous month.

However, the British Bankers Association added that the number of new approvals rose 26 per cent to 31,630 in March. Approvals are an important indicator of actual borrowing in six to eight weeks' time.

The BBA's figures came as a separate survey by TSB showed that since the new year the average cost of buying a home has dropped by 5.6 per cent, based on the cost of a typical mortgage for each pounds 100 of take-home pay.