The Government is considering plans to restrict the flow of money in and out of Britain to protect the economy in the event of a full-blown euro break-up.
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10:00PM GMT 26 Dec 2011
The Treasury is working on contingency plans for the disintegration of the single currency that include capital controls.
The preparations are being made only for a worst-case scenario and would run alongside similar limited capital controls across Europe, imposed to reduce the economic fall-out of a break-up and to ease the transition to new currencies.
Officials fear that if one member state left the euro, investors in both that country and other vulnerable eurozone nations would transfer their funds to safe havens abroad. Capital flight from weak euro nations to countries such as the UK would drive up sterling, dealing a devastating blow to the Government’s plans to rebalance the economy towards exports.
Earlier this year, Switzerland was forced to peg its currency to the euro to protect the economy after a massive appreciation in the Swiss franc due to spiralling fears over Europe.
The plans emerged as Spain’s new finance minister Luis de Guindos warned the country’s economy was set for negative growth in the last quarter.
Speaking yesterday he warned the next two months “are not going to be easy”.
Britain’s response to the possible break up of the euro would reflect measures taken by Argentina when it dropped the dollar peg in 2002, according to sources.
In addition to the risk of an appreciating currency, dealing with potential UK corporate exposures to the euro poses a considerable challenge for the Treasury.
Britain’s top four banks have about £170bn of exposure to the troubled periphery of Greece, Ireland, Italy, Portugal and Spain through loans to companies, households, rival banks and holdings of sovereign debt. For Barclays and Royal Bank of Scotland, the loans equate to more than their entire equity capital buffer.
Under European Union rules, capital controls can only be used in an emergency to impose “quantitative restrictions” on inflows, which would require agreement of the majority of EU members. Controls can only be put in place for six months, at which point an application would have to be made to renew them.
Capital controls form just one part of a broader response to a euro break-up, however. Borders are expected to be closed and the Foreign Office is preparing to evacuate thousands of British expatriates and holidaymakers from stricken countries.
The Ministry of Defence has been consulted about organising a mass evacuation if Britons are trapped in countries which close their borders, prevent bank withdrawals and ground flights.
Treasury officials would not comment on the specifics of any plans but said the Government always had contingency plans that cover a full range of eventualities.
A break up of the euro would have a devastating impact on the UK. HSBC economists have warned that it could trigger a global depression and forecasters at the Centre for Economic & Business Research reckon it would knock about a percentage point off UK growth – plunging the country into a full-blown recession in 2012.
The scale of economic problems alongside the existing debt burden would leave the Government with little in its armoury to combat the collapse, making capital controls one of the few viable options.
There is a glimmer of good news for the global economy with upbeat figures expected today from the US. Reports from America suggested US consumer confidence figures out today could rise to a five month high as house prices stabilise.
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