David Cameron warns of possible euro break-up

David Cameron responds to questions in the House of Commons about the prospects for the eurozone (PA)

Europe faces the potential break-up of the single currency unless it takes urgent action to deal with the euro crisis, Prime Minister David Cameron warned today.

He was speaking as Bank of England governor Sir Mervyn King said the single currency area was "tearing itself apart" and confirmed the Bank was working on contingency plans to protect the UK in the event the euro collapses.

Responding to questions in the House of Commons about the prospects for the eurozone, Mr Cameron told MPs: "It either has to make up or it is looking at a potential break-up. That's the choice they have to make and it is a choice they can't long put off."

His comments - expected to be echoed in a high-profile speech on the economy tomorrow - came as Sir Mervyn warned that the risk of "a storm heading our way from the continent" was the greatest threat to economic recovery in Britain.

It was the first time that the PM has referred so dramatically in public to the possibility of the euro splitting up as a result of the current crisis over Greek debt, and comes just two days after Chancellor George Osborne warned that "open speculation" about the future of some eurozone members was damaging the European economy.

Uncertainty over the future of the euro heightened today as Athens named June 17 as the date for fresh elections, after the collapse of nine days of negotiations to form a unity government.

Meanwhile, European Commissioners met in Brussels to respond to pressure from France's new president, Francois Hollande, for measures to boost growth across the continent, to balance the austerity demanded in countries like Greece in return for multi-billion pound bail-outs.

Commission president Jose Manuel Barroso said a new "growth initiative" would be presented to national leaders at the European Council meeting scheduled for the end of June.

Mr Barroso said the Commission would "work tirelessly" to allow Greece to remain a part of the EU and the euro.

Asked whether Mr Cameron's comments amounted to a signal to Greek voters about which way to vote next month, the PM's spokesman said: "Who the Greeks elect as their government is completely a matter for them.

"I think the main political parties in Greece are all in favour of being in the euro."

Aides said the PM had discussed his comments in advance with Mr Osborne, and stressed that he was not predicting the break-up of the euro.

"He would obviously rather it was 'make up'. There would be huge implications for us if it was the 'break-up' option," said one source close to the PM.

Stock markets across Europe were unsettled by the continuing uncertainty over whether any new administration in Athens will be able to honour the national austerity policy agreed as part of multibillion-pound EU-IMF bailout packages to keep Greece afloat.

Since his keynote speech at Davos in January, Mr Cameron has repeatedly made the case for the eurozone to take "decisive action" to restore stability, including agreeing a bailout fund of sufficient size to act as a credible "firewall" against contagion from troubled economies; action to strengthen banks; and structural reforms to boost competitiveness.

Today he told MPs: "The eurozone has to make a choice. If the eurozone wants to continue as it is, then it has got to build a proper firewall, it has got to take steps to secure the weakest members of the eurozone, or it is going to have to work out if it has to go in a different direction.

"It either has to make up, or it is looking at a potential break-up. That's the choice they have to make and it is a choice they can't long put off."

The European Commission responded to demands for tougher plans for economic growth with a challenge to governments to act on proposals already made.

Yesterday Francois Hollande used his inauguration speech to repeat calls for a new EU "pact" combining public debt reduction with "essential" stimulation of the economy.

Today's Commission reply passes the buck back to eurozone governments.

"We will put together a growth initiative which we will discuss at the June European Council (summit) - the Commission will push for progress on the proposals that have already been put forward." said Mr Barroso.

"These ideas are gaining ground among Europe's leaders now and they have support in the European Parliament. So it is time to agree on these proposals."

On the continuing uncertainty surrounding Greece, Mr Barroso commented: "In a democracy, new elections are the natural consequence of the impossibility to form a government following an election. It will now be for the Greek people to take a fully informed decision on the alternatives, having in mind that this will be indeed an historic election.

"We will of course respect the democratic decision of the Greek people. At the same time the Greek citizens should be aware that there are 16 other democracies in the euro area. The democratic decisions taken in the euro area must also be taken into account."

He added: "We must tell the Greek people that the (bail-out and debt reduction) programme for Greece is the least difficult of all the difficult alternatives. The problems it addresses are real.

"We want to stand by Greece. We want to work together with Greece. Now it is of course up to the Greek people to say if they want to work also with the euro area member states and with the European institutions."

Mr Barroso emphasised: "Greece is part of our family. Greece is a very important member state in the European Union. We want Greece to remain a part of our European family, of the European Union and of the euro. The Commission has been working tirelessly to that end. It will continue to do so."

But he warned: "This being said, the ultimate resolve to stay in the euro area must come from Greece itself."

Mr Cameron's official spokesman denied that the PM's comments contradicted the Chancellor's warning of the dangers of speculating about the future of the euro.

On Monday, Mr Osborne said: "Of course countries have got to make difficult decisions about their public finances. We know that in Britain. But it's the open speculation from some members of the eurozone about the future of some countries in the eurozone which I think is doing real damage across the whole European economy."

The PM's spokesman told reporters: "I don't think there is any contradiction. We have been very consistent about what we think needs to happen."

PA