David Cameron: Eurozone 'at a crossroads'

May 17, 2012 at 2:04 PM
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MANCHESTER, England, May 17 (UPI) -- British Prime Minister David Cameron said Thursday Europe's 2008 financial crisis "never really went away" and urged the purchase of "eurobonds."

His remarks in Manchester preceded an afternoon of conference calls with EU leaders to discuss the potential collapse of the euro, but ahead of the talks he issued a warning that eurobonds may be required "to put an end to speculation about the future of the euro."

The bonds are collective debt issued by the European Central Bank, funding that would be used to bail out struggling countries. The debt would be created by the eurozone as a whole, indicating richer countries would absorb more risk than poorer ones. German Chancellor Angel Merkel opposes a bond issue for that reason, The Daily Telegraph said Thursday.

Cameron said monetary policy in the eurozone "must also do more," pointing out British domestic interventions that include the easing of credit, mortgage breaks for first-time home buyers and government guarantees for new infrastructure projects. He also addressed Europe's competitiveness relative to China and India, saying: "We all need to address Europe's overall low productivity and lack of economic dynamism, which remains its Achilles Heel. Most EU member states are becoming less competitive compared to the rest of the world, not more."

He added Britain's interests would be served by eurozone leaders sorting out their problems.

Cameron's remarks followed a comment by Bank of England Gov. Mervyn King Wednesday that Britain is drawing up contingency plans for a eurozone breakup.

The economic and monetary union is "tearing itself apart without any obvious solution," King said, calling the euro debt crisis the single biggest threat to Britain's economic recovery.

Britain is in a double-dip recession. The eurozone is Britain's biggest trading partner.

The central bank did not predict a breakup of the single currency area.

In Madrid, Prime Minister Mariano Rajoy, who took office in December, warned of a possible borrowing freeze for his debt-ridden country.

With investors charging a record-high 6.5 percent to lend money to Spain, the country faces "a serious risk that [investors] will not lend us money -- or they will do so at an astronomical rate," he told reporters Wednesday in a Spanish Parliament hallway, in his first public appearance this week.

Those high interest rates -- to induce investors to hold risky Spanish debt rather than low-risk debt of stronger economies -- eventually brought Greece, Portugal and Ireland to call for costly international bailouts.

Given this backdrop, Rajoy's government is "taking the measure we have to take," he said. "We must continue cutting public spending."

He denied Madrid was negotiating some type of help to overcome its problems.

"Nothing of the sort has been discussed, and I have talks with the main European leaders almost every week," he said.

Spain is headed toward a budget deficit of 6.4 percent of gross domestic product this year and 6.3 percent next year, the European Commission forecast Friday.

This amount is more than twice the 3 percent maximum allowed under EU rules and exceeded Madrid's promised target of 5.3 percent this year.

Spain will be the only eurozone country to remain in recession next year, the commission forecast.

"This is the strongest indication yet that austerity is failing in Spain," Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd., a London consulting firm that specializes in sovereign credit risk, told The New York Times.

"Spain stands out like a sore thumb," he said.

The Spanish government ordered banks to set aside $39 billion in provisions against bad loans Friday after ordering them to set aside $64 billion in provisions in February.

Spanish banks are sitting on a combined $230 billion of troubled assets, with investors increasingly concerned about the viability of the Spanish banking system, Spanish newspaper El Pais said.

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