Perilous
Times
Eurozone crisis will hit UK hard, warns Cameron
Markets settle after good news from Greece and Italy, but Osborne
describes situation in Europe as 'dangerous'
Heather Stewart and Allegra Stratton
The Guardian, Saturday 12 November 2011
The economic mood in Europe improved after new Greek prime
minister Lucas Papademos (above) was sworn in and the Italian
senate passed new austerity measures – but Britain can still
expect a rough ride, the British prime minister has warned.
Photograph: Louisa Gouliamaki/AFP/Getty Images
Britain's economy will be hit hard by further turmoil in the
eurozone, David Cameron has warned, despite widespread relief on
world financial markets as a new leader was installed in Greece
and Italian politicians backed harsh austerity measures.
The prime minister insisted a "big question mark" remains over the
future of the single currency, amid signs that the political
impasse in Italy that sparked panic among investors may be close
to a resolution. George Osborne, the chancellor, described events
on the continent as "dangerous", adding: "There's no doubt that
growth in Britain, jobs in Britain, have been hit by what's going
on in the eurozone."
The fragile state of Britain's economy will come back into focus
next week, with the latest jobless figures expected to show that
public sector job cuts and the collapse of confidence among
businesses have caused unemployment to rise rapidly.
The number of young people out of work is expected to hit 1
million, and with Osborne due to deliver his autumn statement on
29 November, pressure is increasing on the government to take
urgent action to boost economic growth. The deputy prime minister,
Nick Clegg, tells today's Times that Osbornes's autumn statement
must deliver for the young, adding that it is "morally imperative"
for the government to act.
The chancellor made clear that he intends to blame events across
the Channel for the deteriorating economic outlook and to insist
that deviating from his deficit-cutting strategy would expose the
UK to the kind of loss of investor confidence faced by Italy in
recent days.
"It's all the more reason that we in Britain weather this storm by
taking the difficult decisions we take on our own terms – rather
than being forced to do so by the markets," he said.
The prime minister told Radio 2's Jeremy Vine show that if UK
interest rates hit Italian levels, it would be "calamitous". "If
we risked spending a lot more money or giving up on our plan to
get on top of our debts and our deficit, interest rates could go
up, mortgage rates could go up. That would be the worst thing for
family finances."
But Labour accused Cameron of being "irresponsible" after he
conceded that, despite his public exhortations to Germany to allow
the European Central Bank to bail out debt-ridden states to calm
the crisis, he had not spoken to Angela Merkel or Nicolas Sarkozy
for the past three days. His official spokesman conceded that no
conversations were planned for the weekend either.
"This laid-back attitude from our prime minister is now so out of
touch with the needs of businesses and hard-pressed families, it
is becoming deeply irresponsible," said Rachel Reeves, the shadow
chief secretary to the Treasury.
Cameron's spokesman insisted that "the action lies with the
eurozone to implement the package that it has agreed. What the
prime minister is focused on is ensuring that we protect the UK
economy from the global economic storm." He added that the
eurozone needed "action, not further meetings".
Former central banker Lucas Papademos was sworn in as prime
minister in Greece with a promise to implement the reform measures
and spending cuts demanded of the country as part of the latest
international bailout package agreed in Brussels earlier this
month.
In Rome, the centre of this week's market turmoil, the senate
passed a controversial package of reform measures. The lower house
is expected to follow suit in a special session on Saturday,
clearing the way for the former European commissioner Mario Monti
to take over as the leader of a so-called technocratic government.
Financial markets were reassured by events in Greece and Italy,
with the FTSE100 closing up just over 100 points, or 1.85%, at
5545.38, while the German Dax, rose by 3.2%. The Dow Jones in New
York rose 259 points or 2.2%.
There was a welcome decline in the Italian bond yield – the
interest rate the embattled government pays on its debts – which
jumped above 7% on Wednesday, the level that triggered bailouts
for Ireland, Portugal and Greece. By the end of Friday, yields had
declined to 6.47%. However, economists are warning that even if
the immediate crisis is over, confidence has been shaken by the
events of recent days, and the eurozone economy is heading for a
double-dip downturn.
Michael Saunders, European economist at Citigroup, said that since
the onset of the recession that followed the collapse of Lehman
Brothers three years ago, the UK and the rest of Europe had lived
through the early part of a "lost decade" like the prolonged
period of stagnant growth experienced in Japan from the early
1990s. "For Europe and the UK, this will be about as bad as
anything Japan experienced."
Jonathan Loynes, European economist at Capital Economics, said:
"There still seems to be extraordinary complacency about the
effect all this will have on the eurozone. All the indicators are
pointing to a deep recession, and all that's without the euro
blowing up. If the euro blows up, it's another Lehman, or even
bigger."
He said the Treasury could be forced to take fresh emergency
measures to prop up the financial system if the crisis worsens.
"It's very likely that there will need to be more support for
banks."