22.05.2012
By Simon Miller
The Chancellor of the Exchequer George Osborne has revealed that the Treasury is planning for a Greek exit from the eurozone.
Welcoming the International Monetary Fund (IMF) to the Treasury for its annual assessment of the UK economy, the Chancellor said that it was clear that Europe was "reaching a critical point for the eurozone".
He commented: "The eurozone countries need to stand behind its currency or face up to the prospect of Greek exit, with all the risks that could involve."
Osborne continued: "The British Government is doing contingency planning for all potential outcomes - it's our responsibility to ensure the best while preparing for something worse."
The IMF has warned that the UK will need a plan B if the eurozone situation deteriorates.
In its annual Article IV assessment of the UK, the Fund said Britain should prepare temporary tax cuts and increased infrastructure spending to support the economy if the eurozone crisis escalates.
"Fiscal easing and further use of the government’s balance sheet should be considered if downside risks materialize and the recovery fails to take off," the IMF said.
It continued: "Fiscal easing measures in such a scenario should focus on temporary tax cuts and greater infrastructure spending, as these may be more credibly temporary than increases in current spending."
The fund said that an "escalation of stress in the euro area could set off an adverse and self-reinforcing cycle of lower confidence and exports, higher bank funding costs, tighter credit, and falling asset values, resulting in a substantial contractionary shock".
Last week European commissioner for trade Karel De Gucht became the first European official to openly admit to contingency planning for a 'Grexit'.
He told Belgium newspaper De Standaard: " A year and a half ago there may have been the danger of a domino effect. But today there are, both within the European Central Bank and the European Commission, services that are working on emergency scenarios in case Greece doesn't make it."
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