The Bank of England is drawing up contingency plans for the potential collapse of the euro, as the bank’s governor Sir Mervyn King warned the single currency bloc was “tearing itself apart without any obvious solution”.
David Cameron yesterday joined Sir Mervyn in attacking the lack of progress in tackling the eurozone crisis as the region’s problems threatened to drag down the ailing UK economy even further.
The Prime Minister said the area faced a “make up or break up” scenario.
The stark warnings came as financial markets suffered further losses as Greek leaders braced themselves for fresh elections after talks to form a coalition government failed.
Presenting the Bank’s quarterly inflation report, Sir Mervyn confirmed he and his colleagues were working on contingency plans should the eurozone break up.
Warning the UK was at risk of being in the path of the eurozone storm, the governor ruled out a return to pre-financial crisis levels of growth before 2014 – with the Bank now expecting insignificant growth in 2012.
He repeated his calls for European leaders to deliver a “credible solution” to the region’s crisis, while Mr Cameron later urged his continental counterparts not to “put off” much-needed action.
In a further blow to UK households, the Bank said the rate of inflation will fall more slowly than previously expected, remaining above the Government’s two per cent target for the next year or so.
But even after slashing its growth forecasts for both 2012 and 2013, some economists insisted that the Bank was still “too optimistic”, prompting expectations for more quantitative easing measures later this year.
Sir Mervyn warned that even with a “credible and effective” response from eurozone leaders, a prolonged period of sluggish growth and heightened uncertainty was still likely for the region.
He said: “We are navigating through turbulent waters, with the risk of a storm heading our way from the continent. We don’t know when the storm clouds will move away.”
London’s leading shares index fell to its lowest point since December as fears that Greece will crash out of the eurozone continued to plague world markets.
The FTSE 100 Index was down 32.4 points at 5405.3 as investors continued to fret that another election in Greece next month will see anti-austerity parties emerge victorious.
That could lead to the country being denied further EU bailout money, defaulting on its debts and being ejected from the single currency.
The country could be denied further EU bailout funds if a party opposing necessary austerity measures comes to power, which could in turn lead to Greece exiting the euro.
The troubles in Greece came after the newly-installed French president, Francois Hollande, was in Berlin arguing that the German-led austerity strategy was too rigid and must be balanced with effective growth initiatives.
Meanwhile a senior judge has been sworn in to head Greece’s caretaker government for a month as it continues to lurch through a political crisis.
Council of State head Panagiotis Pikrammenos, 67, was appointed to head a government that will lack the mandate to make any binding commitments until a new election, which is expected on June 17.
About E700m (£559m) in deposits have left Greek banks since May 7, the day after the election.