Prime Minister calls for more firepower in the euro crisis, experts warn collapse could cost Britain £ 120 billion
The Prime Minister and Chancellor George Osborne joined forces to demand greater ‘firepower’ from the Eurozone in order to prevent a ‘calamity’ hitting the UK.
And last night Mr Cameron enlisted the backing of US President Barack Obama for a five point plan to save the world economy.
New research by the House of Commons library revealed that British banks have direct liabilities of £120 billion – or £4,800 for every family in the UK – to the sovereign debts of the Eurozone countries.
That would be the cost to British banks if Eurozone countries defaulted – but the risk is actually far greater because banks in the UK also have hundreds of billions of pounds of exposure to other banks, particularly in France and Germany.
In an interview yesterday, Mr Cameron demanded a much bigger Eurozone bailout fund – the ‘big bazooka’ solution – which would see the amount set aside by the 17 nations in the single currency from £378 billion to up to £1.5 trillion.
The Prime Minister also called on France and Germany to devise a plan to recapitalise Europe’s banks, finally explain whether and how Greece will default on its debts and improve economic governance in the single currency.
Finally, he said the International Monetary Fund should be ‘holding feet to the fire’ more in the Eurozone.
Mr Cameron discussed this five point plan in a call last night with President Obama. A No 10 official said: ‘They are both clear that there needs to be decisive action.’
Earlier the Prime Minister warned that the troubles in Europe were having a ‘chilling effect’ on the global economy and that the situation was ‘very precarious’.
He said: ‘You either make the Eurozone work properly or you confront its potential failure. Time is short, the situation is precarious.’
In a stark statement to the Commons Mr Osborne said the G20 meeting of world leaders in Cannes early next month is the ‘the last possible time that we can resolve this’.
He said the world economy was under threat because of a ‘lack of leadership from the Eurozone’, which he said was at the ‘epicentre’ of the swirling economic crisis.
But in a statement to Parliament, he also warned: ‘The break-up of the Euro would be absolutely calamitous for the British economy.’
The Chancellor said: ‘We need a comprehensive solution which ring-fences vulnerable eurozone countries, recapitalises Europe’s banks and resolves the uncertainty about Greece.’
Eurozone leaders agree to bail out the Greeks but the markets now assume Greece will have to default on some of its debts – but France and Germany have been slow to clarify what will happen.
Mr Osborne condemned the ‘weekly drama’ around the fate of Greece and added: ‘The eurozone needs to come to a clear decision now and stick to it.’
Shadow Chancellor Ed Balls, who dug out the data on Britain’s potential bank losses, said the coalition’s austerity plans have left the UK more vulnerable.
He said: ‘We warned the Chancellor of the dangers of ripping out the foundations of the house here in Britain with a reckless approach to deficit reduction.
‘But the Chancellor is right to say today that the crisis in the Euro zone now constitutes a direct threat to our already flat-lining economy.
‘Not least because since last autumn, the only EU countries with slower growth than Britain are Greece and Portugal – with no growth.’
It comes as a top Bank of England official said Britain is living through ‘uncomfortably interesting’ times and said the economic outlook is ‘overwhelmingly negative’.
In a speech in London yesterday, David Miles, a member of the Bank’s interest rate setting committee, said the crisis has continued for longer than the First World War.
The run on Northern Rock by its panicked customers took place in September 2007, which means the crisis has lasted for more than four years.
Mr Miles also defended the Bank’s decision to begin another round of printing money after announcing another £75billion of quantitative easing last Thursday.
He acknowledged that there is a ‘good deal of scepticism’ that the second round of quantitative easing, dubbed QEII, will work, but said he backs the plan.
Mr Miles said it was needed to keep inflation above the Government’s target of two per cent.
Speaking at the Royal Economic Society, he said: ‘The reason the MPC [interest-rate setting committee] has embarked on a second round of asset purchases is that it is more likely than not that otherwise demand would be so weak that inflation would fall below the Bank’s target.’
He admitted this argument might sound ‘far-fetched’ at the current time when inflation is close to five per cent, and expected to rise higher in the coming months.
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