Daily Mail | Nov 11, 2011
By Tim Shipman and Rob Davies
Vince Cable warned that banks are facing an 'Armageddon' scenario
Britain was preparing for economic ‘Armageddon’ last night as the European Union warned the UK is at serious risk of a double-dip recession.
The toll of the turmoil in Europe to our economy was laid bare in a report which predicted the UK could slip into negative growth over the next six months – and economic forecasts were slashed for the whole of Europe.
David Cameron said the Treasury was planning for ‘all eventualities’ and warned eurozone leaders they have to act now or face a ‘moment of truth’ that will leave the world in a worse position than the 2008 credit crunch.
With fears that the euro could collapse altogether, Business Secretary Vince Cable said that such an outcome would unleash an ‘Armageddon scenario’ that would drag British banks down as well.
With Italy forced to borrow £2billion more yesterday to stave off bankruptcy, fears were growing last night that France and Spain will be the next to face contagion from the debt crisis as the interest they have to pay on their debts crept inexorably upwards.
The burgeoning crisis spread yesterday when the EU admitted that the debt disaster is now obliterating the prospects of healthy economic growth in Europe.
Officials in Brussels painted a grim picture of the UK’s economic prospects for the next two years, warning ‘contraction in GDP in at least one of the next few quarters cannot be ruled out’ – code for a double dip recession.
The report forecast that British economic output would grow by just 0.7 per cent in 2011, while inflation and unemployment rise.
And in a worrying sign that the economy could stagnate well into next year, growth will slow even further in 2012, to 0.6 per cent.
The prognosis for the eurozone is even bleaker, the report said, warning that economic recovery in the single currency has ‘come to a standstill’ – with growth projected to be just 0.5 per cent next year, compared to a previous forecast of 1.8 per cent.
The Commission’s economics supremo Olli Rehn said: ‘Growth has stalled in Europe, and there is a risk of a new recession.’
Asset management firm Schroders also predicted a ‘serious’ eurozone recession in 2012, and this could result in a recession in EU countries such as Britain which are outside the single currency.
European economist Azad Zangana said: ‘Politicians have missed their opportunity to prevent a European credit crunch.’
With EU leaders paralysed by inaction, EU Commission president Jose Manuel Barroso made the barely credible statement that all EU countries, including Britain, should now join the single currency.
‘All EU states should have the euro as its currency,’ he said – a notion dismissed as ‘absurd’ by senior officials in London.
The crisis was yesterday centred on Italy, where former EU commissioner Mario Monti is expected to imminently take over as prime minister from Silvio Berlusconi, who has promised to stand down once financial reforms are passed.
The Italian government was forced to borrow another £2billion on the markets at an interest rate of 7 per cent – the threshold which has triggered financial rescue packages for Greece, Ireland and Portugal.
David Cameron warned that Italy could drag the rest of Europe down. In a speech to business leaders in London, he said: ‘Its current state is a clear and present danger to the eurozone and the moment of truth is approaching.
‘If the leaders of the eurozone want to save their currency then they – together with the institutions of the eurozone – must act now. The longer the delay, the greater the danger.’
Vince Cable, asked what would happen if the euro collapsed, said: ‘Well, certainly it affects our trade; and potentially – in what [is called] an “Armageddon scenario” – it affects the banking system.’
The Prime Minister’s remarks that the ‘institutions of the eurozone’ must act was a reference to the European Central Bank (ECB), which the British Government has been calling on to act as lender of last resort for the single currency.
Yesterday the ECB bought more than £200million of Italian bonds – but officials said they could do no more to help.
Downing Street and the Treasury are in a state of near despair about the refusal of German Chancellor Angela Merkel to sanction the ECB backstopping the euro, the only action they think will calm the markets.
Meanwhile, the contagion continued to spread. The price Spain pays to borrow – known as its bond yield – is already worryingly high at 5.85 per cent, while storm clouds are starting to gather around France.
The interest rate on French debt reached 3.4 per cent compared to Britain’s 2.2 per cent and Germany’s 1.75 per cent.