Six weeks to save the euro: Chancellor’s warning after another day of financial turmoil

Posted: September 24, 2011 in European Economy
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By James Chapman- Mail Online

World leaders were warned last night that they have just six weeks to save the euro from collapse.

On another day of gathering economic gloom, George Osborne savaged eurozone leaders for failing to get a grip on their towering debts.

The Chancellor set a deadline of six weeks – when leaders of the G20 group of leading countries will meet for crunch talks in France – for action.

He said: ‘Patience is running out in the international community. There is a sense from across the leading lights of the eurozone that time is running out for them.

‘The eurozone has six weeks to resolve this political crisis.’

Mr Osborne also signaled dramatic plans to prop up Britain’s faltering economy, opening the door for a  rescue plan that would see the  Bank of England lend directly to struggling small businesses.

In other developments:

IMF chief Christine Lagarde said the challenge facing the world ‘could not be more urgent’; World markets remained dangerously volatile, with Britain’s leading firms seeing £78billion wiped off their value this week; The G20 insisted it would take necessary steps to try to stop the eurozone crisis spreading; Debt-laden Greece admitted for the first time that an ‘orderly default’ was an option; Economists at the Royal Bank of Scotland predicted that Europe is falling back into recession.

There is a growing expectation in Whitehall that the Bank of England will authorize another emergency injection of cash into the economy with a second round of ‘quantitative easing’ – essentially, printing money.

As much as £300billion is expected to be flooded into the economy despite the risk that it will push inflation still higher, increasing the cost of living.

The Bank has already poured £200billion into the economy to try to bolster growth, but there have been renewed calls for another dose of the medicine.

Mr. Osborne, in Washington, signaled that he is open to the idea of the Bank ring-fencing some of the cash for direct loans to small or medium-sized firms that are in urgent need of help to expand or simply keep afloat.

The Chancellor wants a £350billion European Financial Stability Facility, which provides bailouts for countries at risk of defaulting on their debts and sending shockwaves through the world’s banking system, to be beefed up. ‘I am not sure it is adequate,’ he said.

Britain is also pushing the euro countries to move quickly to ensure banks in the danger zone have more capital, to ensure they can withstand market pressures.

Mr. Osborne refused to be drawn on whether Greece would be forced into a debt default and a potential exit from the single currency, but revealed that Britain has contingency plans to cope with such an outcome.

IMF chief Christine Lagarde said the challenge facing the world ‘could not be more urgent’

‘I have made it a priority for the Financial Services Authority and the Bank of England to make sure that the UK banking system is adequately capitalized and has sufficient liquidity to deal with all eventualities,’ he said.

He admitted that the growing international economic crisis would hit Britain, but flatly rejected calls to soften his deficit reduction plan.

‘The UK is taking appropriate action,’ he said. ‘It is very clear what has got to happen. We are sticking to the plan. We have got ahead of the curve and have credibility.’

Michael Saunders, an economist at CitiBank, said he had halved growth forecasts for Britain to 1 per cent this year and just 0.7 per cent next year.

He said he expected unemployment to rise from 7.9 per cent to 9 per cent, which would bring the total close to the 3million who were out of work in the 1980s.

Mme Lagarde warned again of ‘downside risks on the horizon’ for the global economy and said developing economies must play a part in propping it up.

The IMF boss said: ‘There is growth. The bad news is that it is slow growth. There are downside risks on the horizon, and they are piling up. Negative feedback loop between weak growth, weak banks, and what is very much perceived as weak political commitment. This has led to a crisis of confidence.’

Echoing Mr. Osborne’s refrain about the need for deficit reduction in Britain, she added: ‘We are all in this together. There are dark clouds over Europe and huge uncertainty in the U.S., and with that we could see collapse in global demand.’

The FTSE 100 Index lost 5.6 per cent or £78billion from its value this week, the second worst weekly fall this year, despite a last-minute push which saw it close 0.5 per cent higher on the day yesterday.

America has lost patience with Europe- By Alex Brummer

The veteran U.S. monetary official did not mince his words in a private conversation over dinner. ‘America is very, very angry over what has been going on in the eurozone.’

As the markets went into freefall over the last few days, the deterioration in relations between the U.S. and the countries of the single currency has become frightening.

The Americans believe that if the world were to tumble back into recession or a prolonged depression, as looks increasingly likely, it would be the euro area to blame.

They were made to recognise that the falls in share markets around the world, which have impoverished tens of millions of savers and pensioners, are fed by fear for future global prosperity and are not the result of some Anglo-Saxon plot to bring down the single currency.

The reality is that months of appalling indecision, driven by some of the mini-countries within the monetary union, had in fact underlined the need for Germany and France to seize the political opportunity to bring the crisis to an end.

The final deadline set by the G20 for sorting out the mess is the Cannes G20  summit on the first weekend of November. That, if all goes well, should see the formal launch of the European Financial Stability Facility (of which Britain is not a part), a bailout fund that is capable of rescuing Greece.

That may all seem hunky-dory. But in the world of fast-moving, testosterone- and panic-fuelled financial markets, it looks a lifetime away. If shares were to continue to fall at the mad pace of the last few days – wiping out great chunks of the capital of Britain’s major companies – then all bets would be off.

The big lesson of the Great Depression of the 1930s is that governments and central banks around the world were too slow to act.

Euro leaders claim they are victims of Parliamentary timetables which have meant long delays in getting the bail-out fund up and running.

But investment managers, hedge funds, the big global banks and other market participants have lost faith in the eurozone’s will to act. The eurozone needs to move to a war footing, by pumping new capital into its banks, and setting up a rescue fund with the capacity to save Italy or Spain if it became necessary.

Britain cannot divorce itself from events given that up to 80 per cent of our trade is with euro-area nations.

Without a eurowide rescue, the prospects of heading off a prolonged slump – which will devastate every British household and business – will be remote.

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