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Euro zone weakness a big risk to UK - Bank's Posen

Source: Reuters - Tue 18th May 2010

Britain's economy could be seriously hit by weakness in the euro zone, the country's biggest trading partner, Bank of England policymaker Adam Posen said in the script of an interview for broadcast Tuesday.

Posen said market jitters related to the EU-led rescue package for highly indebted euro zone countries were not surprising and reflected the reality that growth in much of the shared currency bloc would be very slow for several years.

"Sixty percent of our trade is with the euro area. So we view this as a very real risk" Posen told U.S. broadcaster National Public Radio, according to a script provided by the broadcaster.

"If the euro area goes down then that does have a huge impact on us" he said in the interview recorded Friday for NPR's Morning Edition show. Posen was asked about recent comments by former U.S. Federal Reserve Chairman Paul Volcker which cast doubt on the euro zone's future.

"Volcker's comments are looking at a worst-case scenario which I don't think is very likely, but you have to say it's certainly more likely now than it ever was at any point in the previous 11 years (that) the euro existed" Posen said.

NPR said Posen was untroubled by sterling's recent weakness.

"It's just good to keep some perspective that currencies go up, currencies go down. The fundamental thing about Europe is that the euro area is going to be growing slowly the next few years. That's the big news, and that's the sad part" Posen said.

The Bank has previously identified euro zone economic weakness and market worries about sovereign credit risk as a threat to British economic growth, most recently in last week's quarterly Inflation Report.

Few economists expect Bank interest rates to rise from their current record low of 0.5 percent before late this year at the earliest, despite inflation hitting a 17-month high of 3.7 percent last month..