Warning to UK over eurozone crisis

AN ESCALATION of the eurozone crisis would deliver a “substantial contractionary shock” to the UK economy, the International Monetary Fund warned today.

In a report on the UK, the IMF identified uncertainty over the future of the euro as the main danger to recovery and warned: “Risks are large and tilted clearly to the downside.”

The report noted “substantial progress” towards balancing Britain’s books thanks to the Government’s deficit-reduction programme, but noted that the economy remains “flat” and warned the weak recovery may be “protracted”.

Although recovery is expected to gain pace from the second half of 2012, the IMF said unemployment is “much too high” and said much of the UK’s productive capacity could remain “idle”.

The fund called for further monetary stimulus in the form of the Bank of England printing money in another round of “quantitative easing” or an interest rate reduction, from its record low of 0.5%, to make borrowing cheaper.

Today’s report follows an annual IMF mission to the UK to assess the state of the country’s economy and the effectiveness of Government policies in supporting it.

Chancellor George Osborne said: “The IMF couldn’t be clearer. Britain has to deal with its debts and the Government’s fiscal policy is the appropriate one and an essential part of our road to recovery.”

Mr Osborne said the eurozone was reaching a “critical point” and confirmed that Britain was preparing to deal with the shock of a failure in the single currency.

IMF managing director Christine Lagarde described the UK as a “global hub”.

She said: “Unfortunately the economic recovery in the UK has not yet taken hold and uncertainties abound.

“The stresses in the euro area affect the UK through many channels.”