Home Business News Will the UK stump up £25bn to save the Euro?

Will the UK stump up £25bn to save the Euro?

18th Dec 11 11:05 pm

David Cameron is under pressure to make us the second-largest contributor to a new rescue fund.

David Cameron’s position is not all that enviable at the moment. He is facing a likely second recession in the UK, he inflames certain members of his precarious cabinet on an almost daily basis, and a good bulk of the populace loathe him for making the extreme public sector cuts that were his only route to stabilising the markets’ view of this country. It ain’t an easy job, being prime minister.

Now the PM must apparently take another impossible decision: whether to contribute £25bn to a new bail-out fund designed to save the single currency. The money will be part of a new €200 billion (£167.7 billion) loan to the International Monetary Fund, as part of an arrangement to rescue the euro.

The UK’s contribution to this new rescue fund would be critical: European officials say that a UK input of £25bn would make this country the second largest financial contributor to the fund, joint with France and behind Germany, the Telegraph reported on Sunday night. Three quarters of the money will come from Eurozone members.

Now, we all know Cameron’s relations with Europe have been slightly curdled of late. His bold veto suggested his determination to put the UK ahead of the Eurozone. But it would be grossly naive to think that Cameron could just blithely wave away this desperate call for cash – even despite his repeated assertions that he will not give any more government money over to the IMF to save the Euro.

The pickle of the situation is that the UK urgently needs the Eurozone to stabilise. It would be disastrous for the single currency to fail in the immediate future. Europe buys 20 per cent of UK exports. UK banks hold vast swathes of Eurozone debt – which is in part why only last week Barclays’ credit rating was downgraded by ratings agency Fitch.

If the Euro fails anytime soon, or even if one too many countries are ejected from it too quickly, our banks’ holdings of Eurozone debt (or the debt of ejected Eurozone countries) will almost certainly severely devalue. This, on top of the squirreling of capital reserves our banks are being forced into, and the increasingly punitive regulations they are facing, essentially means UK banks would have a lot less cash to splash. So they would become increasingly reluctant to lend money. And that is a terrible threat to the livelihood of British businesses, and to our economy.

More fundamentally, if the single currency fails in the near future, it would accelerate the choppy waves of unease in the money markets into a full blown tsunami of panic. And that, it is widely thought, could well trigger a recession across a good chunk of the developed world. Again, that would not be great news for the UK.

So, yes, Cameron might promise us he won’t put any more of our money towards saving the Euro. He might take an anti Euro stance. And we might even believe that there can’t possibly be a spare £25bn lying around for this country to hand over to the IMF even if we wanted to.

But when push comes to shove, if the single currency’s immediate future really depended on us chipping in to help out, we might just find ourselves somehow making it happen. It would almost certainly mean facing even greater austerity measures. But we would ultimately be trying to safeguard our own economy, so intrinsically bound up with the Eurozone’s.

Would David Cameron make the lose-lose call to part with that full £25bn, money this country so desperately needs? Would he risk the ire and disgust it would engender among most of the general public and the prominent Eurosceptics in his own party?

It’s one heck of a horrible decision, this £25bn matter. We don’t envy the prime minister much.

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