David Cameron warns of eurozone break up without decisive action

10th October 2011

In fact Europe's best selling and most influential financial paper and the Prime Minister almost appear to be acting in concert. At the very least, the newspaper believes the PM is talking a lot of sense.

Among other recommendations, he wants to see a recapitalisation of Europe's banks, for Germany to accept the responsibilities of membership, and to increase the firepower of the eurozone's euro 440bn bailout fund.

The Financial Times devotes the whole of its leader column (a relatively rare event in itself) to the issue under the heading ‘Save Europe's Unity now'.

The paper sees many of the flaws coming from the inability of politicians to explain the situation to their populations.

Among other things, the pink paper says that "Germany, which has much more to lose from a break-up than from putting money behind a solution, should make the case more strongly to its people."

But the paper advocates three other proposals – a debt swap for Greece to write down private credit in return for long term bonds  backed by euro-wide collateral, a massively beefed up European Financial Stability Fund, and moves to ensure banks are better capitalised,  

The paper backs leveraging the EFSF to several trillion euros or failing that for the ECB to buy a lot more Italian bonds.

The quote about France is almost as tough as that aimed at Germany. "The best Europe can do for banks is to submit them to credible stress tests and force more capital on the weakest. France should take note."

Some fund managers are also advocating similar measures. Schroders last week suggested that Greece needed to default, that the EFSF needed to be boosted although it also wanted to see a rate cut from the ECB to boost liquidity as Investment Week writes.

But does this mean France and Germany are listening? Before Cameron's interview, the German Chancellor Angela Merkel and French President Nicolas Sarkozy  said they had reached agreement to fix Europe's banking sector as reported in the Guardian.

A statement said the two "are determined to do the necessary to ensure the recapitalisation of Europe's banks".

But there were few details which may go some way to explaining the Prime Minister's (and the Financial Times') obvious frustrations.

The Guardian's Nils Pratley writes about the divide between Cameron, Merkel and Sarkozy and he sees little prospect for agreement for example to rescue Italy.

"Cranking up the EFSF from €440bn (£380bn) to, say, €1.5tn would certainly qualify as a big move. It is probably impossible to raise such sums with up-front cash (the member states couldn't bear the strain) so leverage is the only option.

"But Germany, seemingly, has ruled out that idea. Unless Merkel performs a U-turn, Cameron's call for Germany and others to accept the "collective responsibility" of euro membership sounds like wishful thinking."

Not all commentators agree with the Prime Minister.

The Mail's financial blogger Alex Singleton says: "The "big bazooka" that's required is not more bail-out cash, but the ejection of members from the eurozone.

"I know this would be painful, in the short term, but it would be a liberating – in the same way that Britain's decision to give up on the euro's predecessor, the Exchange Rate Mechanism, in 1992 took our economy and kick-started it."

More from Mindful Money:

QE2 – A sticking plaster while Europe solves its crisis?

European debt crisis: what is the answer?

How Eurozone Instability affects Global Investors

Reading List: How to rescue the euro: Ten commandments

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