Prime minister says Britain must look to emerging economies for economic salvation
The eurozone crisis could continue for years, forcing Britain to look outside a stagnant euro area for fresh export markets and economic salvation in the emerging economies, David Cameron has said.
His gloomy assessment of "near perpetual stagnation" came as pressure continued on Spanish bond yields and stock markets reacted coolly to the narrow Greek vote to back pro-bailout parties in Sunday's elections.
Speaking to reporters accompanying him to the G20 summit in Los Cabos, Mexico, the prime minister said: "It may be that the eurozone crisis is going to continue for some time, in which case the UK must do all it can to put its own house in order and link up with the fastest growing parts of the world."
There was a serious danger eurozone leaders would be unable for political reasons to take the economic steps necessary to resolve the two-year-old crisis. Cameron regards banking union and a commitment to share debts between eurozone countries as indispensable, but possibly politically unobtainable.
He said: "It's difficult for the recipient countries. It's also very difficult for Germany. We have to understand the German difficulties.
"It is very difficult politically to take the steps that are required economically. We decided not to take those steps when we didn't join the euro.
"But nonetheless if you want a functioning single currency you have to take at least some of those steps. You need to have elements of banking union, fiscal transfers and so on."
He then sketched out three alternatives for the euro-area:
"Option one is that they take action to strengthen the eurozone, to make it more coherent. If this deals with the current problems it is clearly in their and our interests.
"Option two is enough financial action and just enough political and economic action to keep the show on the road, but without solving the fundamental problems.
"Option three is they don't take any of these steps and dominoes start to fall, which would have very severe financial consequences across the world and would seriously affect us."
Cameron, who believes the eurozone will muddle along on a path of slow growth, urged Greek politicians to quickly form a new government. He said: "The outcome of the Greek elections looks positive in terms of a clear commitment to staying in the eurozone and accepting the terms of the memorandum, but those parties that want that to happen cannot afford to delay and position themselves. If you are a Greek political party, and you want to say in the eurozone and you want to accept the consequences that follow from that in the memorandum, you have got to get on with it and help form a government to deliver that. I think delay could be very dangerous."
Britain accepts Greece may need more time to repay its loans.
Before travelling to Los Cabos, Cameron held a conference call with leading eurozone members attending the G20. A senior British diplomat described the call as displaying "a sense of purpose, in that it was a clear enough result to see that there could be a government that wants to stay in the euro and that is prepared to take the measures necessary to go with that.
"There was also a sense that this is a long, hard road that has got to be travelled. And there was a sense of urgency: right, we have had the election, now we need the government. That's where the questions need to go today."
Cameron would like to see some kind of banking union in the eurozone and the emergence of a system of transfer of resources within the euro area, possibly through euro bonds.
His aides say they expect further pressure to be put on Angela Merkel at the G20 summit, just as it was put on the German chancellor at the G8 summit in Washington last month. British officials stressed it had to be "constructive pressure".
Cameron is acutely aware that Merkel wants expectations lowered and that too many European politicians do the opposite at summits, leading to subsequent disappointment in the markets.
Barack Obama was meeting Merkel at the G20 summit separately, to seek an update on German thinking. The US president is also due to meet the key eurozone players – France, Germany, Italy and Spain. This quartet will meet in Italy on Friday ahead of a European council meeting next week.
