IMF warns Britain needs a Plan B in case of eurozone collapse

Posted on May 22, 2012

May 22, 2012LONDON – The UK Government should prepare a Plan B to support the UK economy in the case of a collapse in the eurozone or the failure of recovery to take off, the International Monetary Fund (IMF) has said. The Fund said further easing of monetary policy, by printing money or even cutting the 0.5% base interest rate, was “required” now to inject some vigour into a flat economy. And it said the Government should consider an immediate increase in spending on infrastructure to boost growth and employment. The IMF said possible candidates for temporary tax reductions in any Plan B would be VAT or payroll contributions, as these could credibly be presented as short-term measures which could swiftly be reversed once economic conditions improve. But it warned of the “large” risk of an escalation in the eurozone crisis, which would deliver a “substantial contractionary shock” to the UK economy. While reducing Britain’s deficit over the medium term remains essential, a shock in the eurozone – such as the exit of Greece from the single currency – would force the Government to consider delaying plans to balance the books beyond the current target of 2017 and implement short-term measures to shore up growth, said the IMF in an annual report on the state of the UK economy. “If the economy turns out to be significantly weaker than forecast, fiscal easing should be considered,” said IMF managing director Christine Lagarde. “Measures should be focused on supporting growth and employment.” Today’s report came as the Organisation for Economic Co-operation and Development (OECD) warned the eurozone was close to “a severe recession” which would have knock-on effects on the rest of the world. Chancellor George Osborne warned the eurozone was reaching “a critical point” and confirmed Britain was preparing to deal with the consequences of a failure in the single currency. –WOL

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