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Last updated: July 20, 2011 9:34 pm
George Osborne has urged eurozone leaders to “get a grip” on the sovereign debt crisis at their summit today, warning that failure to do so could unleash an economic crisis as serious as the recession that followed the banking crash of 2008.
The chancellor told the Financial Times he was “very worried” about the possibility of the eurozone crisis spiralling out of control, warning that it posed an additional threat to Britain’s already “tough” economic situation.
“We see the potential for a set of economic events that could be as damaging as 2008,” he said, as he made his most direct intervention yet in the eurozone crisis.
The chancellor was optimistic that the eurogroup of finance ministers would make progress with involving the private sector in reducing Greece’s debts but said this was only the first step towards a necessary fiscal union in the single currency area.
The crisis in the eurozone has turned conventional British thinking on European integration on its head, according to the chancellor.
For years British foreign office orthodoxy has been to resist greater union between members of the single currency, fearing that Britain would be relegated to second-division status with all the big decisions being taken elsewhere.
But George Osborne says the “remorseless logic” of monetary union takes the single currency members in the direction of greater fiscal union, even if that did not necessarily mean having a single European budget or a single EU finance minister.
“I think we have to accept that greater eurozone integration is necessary to make the single currency work and that is very much in our national interest,” he says. “We should be prepared to let that happen.”
Mr Osborne admits this flies in the face of traditional British policy, which has always suspected such a union as being the precursor of an elite group of EU members, which would ultimately dictate policy to those on the outside.
The chancellor seems more relaxed about that possibility, but insists that key decisions must still be taken at the level of all 27 member states, not least on matters affecting the single market.
He recognised that his enthusiasm for greater eurozone integration turned British policy on its head, since it ends the government’s long-standing desire to frustrate the creation of a two-speed Europe. He said “the remorseless logic” of monetary union was greater fiscal union.
Mr Osborne has been accused of standing on the sidelines while the eurozone crisis escalated. But frustration in British government circles about the failure of Germany, in particular, as well as other eurozone countries to resolve the problem is reaching boiling point.
Mr Osborne did not criticise Germany directly but he called for greater economic integration of the single currency area, adding that the idea of eurozone bonds was “worthy of serious consideration”.
However, Mr Osborne argues that the loss of sovereignty implied by solutions such as eurobonds justifies Britain’s refusal to join the euro.
Core eurozone countries, such as Germany, would have to stand behind southern European sovereign debt as guarantors, while the periphery would have to accept German-designed economic policy in return.
He also called for private sector bond holders to share the pain and for the eurozone’s bail-out facility to be expanded to include the purchase of Greek bonds. But he said Britain would not take part in any eurozone solution.
“Britain’s taxpayers stand behind the pound, Europe’s taxpayers are going to have to stand behind the euro,” he said. He also dismissed the idea of a European bank tax to pay for some of Greece’s new bail-out as a “red herring”.
The chancellor insisted there would be no retreat on his tight fiscal consolidation, but admitted that Britain was carrying some “heavy weights” as it struggled to recover from the last recession.
The chancellor’s cautious tone on the economy came as the Treasury published its latest round-up of independent forecasts showing the average of new external estimates for growth have slipped every month from 1.7 per cent in March – in line with the Office for Budget Responsibility’s prediction – to 1.3 per cent in July
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