David Cameron, Britain’s prime minister, will on Thursday warn that the single European currency could unravel in a way that “carries huge risks for everyone” unless the eurozone’s 17 members move rapidly towards full fiscal and political union.
“The eurozone is at a crossroads,” Mr Cameron will tell a business audience in the north-west of England. “It either has to make up or it is looking at a potential break-up.
“Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden sharing and supportive monetary policy across the eurozone or we are in uncharted territory which carries huge risks for everyone.”
Mr Cameron’s stark warning amplified comments made on Wednesday by Sir Mervyn King, the governor of the Bank of England, who said the eurozone was “tearing itself apart without any obvious solution”, threatening the British economy and banking sector.
Mr Cameron and Sir Mervyn’s comments highlight the growing alarm in London that the British economy – already in a double-dip recession – could be plunged into further difficulty as a result of the crisis in the eurozone, which is the UK’s biggest trading partner.
The British prime minister’s comments are likely to infuriate eurozone leaders, who believe his commentary from the sidelines is unhelpful, not least because of Mr Cameron’s unwillingness to put money into a new EU bailout fund.
François Hollande, the new French president, has accused the British of treating the EU like a “self-service restaurant”; he is expected to meet Mr Cameron for the first time in Washington this weekend, ahead of a G8 summit.
Mr Cameron will back Mr Hollande’s proposals to boost European growth – including providing more British capital for infrastructure projects and small business lending - but he insists the eurozone must sort out its own problems.
"The eurozone has to make up or it’s looking at a potential break-up"
Mr Cameron believes it is better for Greece to remain in the eurozone and George Osborne, chancellor, has previously warned that it was “open speculation” about the future of the eurozone that was damaging the economy.
Downing St said that Mr Cameron felt it was all right to join the speculation since it had become a subject of open debate across Europe following the inconclusive Greek elections.
Britain’s central bank did not predict a break-up of the single currency area, but made it clear it was planning for many difficult contingencies whether the euro remained together or not.
“There are major problems ahead,” Sir Mervyn said. “There are major credit losses to be realized.”
"Our biggest trading partner is tearing itself apart with no obvious solution"
Having admitted he should have been “shouting from the rooftops” about risks in the financial system before the financial crisis, Sir Mervyn sought to make amends on Wednesday talking about “storm clouds” coming from across the English Channel.
While economists accept Britain is highly vulnerable to a deepening of the eurozone crisis, they share Labour’s view that Britain’s economic woes are not entirely caused by the eurozone crisis.
Michael Saunders of Citi said: “Of course, we can’t blame the problems of the UK on the euozone. It’s a factor, but the big under-performance has been domestic demand, as the BoE has itself said”.