–Adds Detail To Version Transmitted At 1546 GMT

London (MNI) – The euro area crisis has been an increasing threat
to the UK’s economic recovery, and the Bank of England needs contingency
plans against it deteriorating further, Bank of England Governor Mervyn
said Monday.

King, in evidence to the Treasury Select Committee, cited the
Eurozone’s turmoil as the key factor behind the sharp growth downgrades
in the BOE’s November Inflation Report. He said there were also clear
signs of slowing growth in the world economy as a whole.

The BOE slashed its growth forecasts this month to show growth of
just under 1.3% this year and just over 0.9% next year.

“Looking at growth over the next 12 months … growth in the first
year has been revised down across the board by over 1 percentage point,
so it is a very big reduction,” King said.

“I would say the bulk of that can be attributed, directly or
indirectly, to a changed perception about circumstances in the euro
area,” he added.

The direct impact comes from lower UK exports to the euro area and
the indirect ones from the hit on asset prices and wealth “and also
credit spreads are higher because of the funding costs of our banks, as
well as those in the euro area.”

“Taking all those things together the bulk of the downward revision
is ultimately (due to) the news since August about what is happening in
the euro area,” King said.

He refused to put a precise percentage on what proportion of the UK
growth downgrade was due to the euro area’s woes. Nevertheless, his
comments will provide support to the government, which is insistent the
Eurozone, rather than any domestic factors, are key to the current
weakness of the UK’s economic outlook.

More than a year ahead, the BOE made only small changes to its
growth outlook, with a rebound in the second and third year forecasts.

King said the “extreme events” that could emerge from the euro area
were simply not included in the central bank’s November forecast, and he
declined to comment on the outlook for individual euro area states,
focussing instead to the underlying weaknesses in the Eurozone.

“Underlying this problem is a crisis of current account imbalances.
Germany and the Netherlands have very large trade surpluses, many
economies in the south, including Greece, have large trade deficits,” he
said.

“The question is how can they get back to a point when these can be
financed and, ultimately, the debt serviced ? What we have seen is that
the private sector since the summer has indicated pretty clearly that it
doesn’t want to finances these current account deficits. That has left
governments to finance these deficits,” he added.

For further information contact David Robinson on 4420 7862 7491
or e-mail: drobinson@marketnews.com.

[TOPICS: M$$BE$]