London, Nov. 18 (Bloomberg) -- Bank of England Governor Sir Edward George said budget deficit rules in the nations sharing the euro are too ``rigid'' and the U.K., one of three European Union countries to keep its own currency, has scope to increase borrowing to pay for improvements to public services. ``Germany is tremendously weak,'' George said in an interview with the British Broadcasting Corp. ``In this country, it's actually helpful that the fiscal deficit will expand as the economy grows more slowly. That's a buffer.''
He dismissed suggestions that slower economic growth will leave a ``black hole'' in Britain's finances and said Chancellor of the Exchequer Gordon Brown has ``room for maneuver'' to fund greater spending on services including transport, education and health care. The comments illustrate George's scepticism about the U.K. swapping the pound for the euro, which would oblige Britain to coordinate its economic policies more closely with the dozen euro nations. It would also mean transferring control of interest rates from the Bank of England to the Frankfurt-based European Central Bank. Economic growth in the euro area will be less than 1 percent this year. The U.K. will probably expand 1.7 percent, according to the International Monetary Fund. Britain, Sweden and Denmark are the only countries among the 15-member European Union which haven't adopted the euro.
George's remarks add to criticism of the stability and growth pact, which was designed by Germany to create confidence in the euro. That agreement holds governments to deficits of 3 percent of gross domestic product.
`Stupid' Budget Accord
Germany, France and Italy, which account for three-quarters of the region's $7 trillion economy, are leading a campaign to loosen the rules. Countries that already have balanced their budgets including Spain and Finland want to stick by the rule. Last month, European Commission President Romano Prodi called the budget agreement ``stupid.'' Brown has called for a looser interpretation that would allow governments to meet their deficit obligations over the course of ``the economic cycle.'' Prime Minister Tony Blair is committed in principle to adopting the euro should the economic case become clear. The Treasury, which reports to Brown, will complete its assessment of whether Britain should join the euro by the middle of next year. Blair has pledged to hold a referendum on joining if the Treasury recommends membership. Less than half of U.K. voters say they'd support the euro, a portion that's remained steady since the currency began trading in January 1999. Earlier this month, Barclays Capital Inc. said an opinion poll commissioned by the lender found 39 percent in favor and 46 percent were opposed.
Wider U.K. Deficit
The government is struggling to fund 53 billion pounds ($76 billion) of improvements roads, schools and hospitals in the next two years even as slower growth dents tax revenue. Brown, in his twice-yearly economic statement due Nov. 27, probably will announce plans for the government to borrow more money in the next few years to cover a growing deficit. In April, Brown forecast the deficit would widen to 11 billion pounds in the current fiscal year from 1.3 billion pounds last year. ``Our finances are in much better shape than in many places the rest of the world,'' George said. ``The chancellor has got a certain amount of room for maneuver. I expect he'll use it.''
The European Commission has criticized Germany and Portugal for that sort of largess. George said the U.K. economy is growing faster partly because the government is raising spending. ``In this country, it's actually helpful that the fiscal deficit will expand while growth will be a little slower than we expected,'' he said. ``In these circumstances, where domestic demand growth in the euro-zone as a whole, but particularly in Germany, is exceptionally weak, it's tremendously important that the fiscal situation should be //www.quote.bloomberg.com