Osborne hopeful for euro solution

High level meetings were taking place at the summit in Mexico after the markets failed to respond to the recapitalisation of Spanish banks and the election of pro-bailout parties in Greece.

No details of a possible scheme were available but it is thought the eurozone countries are considering using injections of funds through the European Central Bank or the single currency bailout mechanisms to shore up weaker countries like Greece and Spain, which yesterday saw the costs of its short-term debt rise even higher.

The resources would be designed to spread the risk of debt between the 17-nation euro bloc, and reduce the high interest rates on government bonds which have made it difficult for Athens, Madrid and Rome to service their debts.

A planned meeting between United States President Barack Obama and the leaders of Germany, Italy, France and Spain, as well as Prime Minister David Cameron, was cancelled on Monday after the Americans decided enough progress was made in earlier talks between Mr Obama and German Chancellor Angela Merkel.

Massive pressure is, however, mounting on the leaders of EU countries at the G20 in Los Cabos, particularly on Germany.

Talks continued in Greece where Antonis Samaras, leader of the New Democracy party which won Sunday’s re-run vote, was seeking an alliance with the third-placed Socialist PASOK and the smaller Democratic Left party.

His mandate to form a government expires today and if he fails the radical Left anti-bailout party Syriza, which has refused to join a coalition, would get a chance to form a government, followed by the Socialists.

While the leaders said a deal was within reach, an EU official said the terms of its bailout must be renegotiated because worsening economic conditions had made the old agreement an “illusion”.

The goals will still be to reduce Greece’s debt and reform its economy to make it competitive, the anonymous source said.

Mr Osborne cautioned against thinking a full solution to the eurozone crisis would be reached at this week’s summit, but indicated he expected steps to be announced either after a meeting of eurozone leaders in Rome at the end of this week or at the full European Council in Brussels next week.

“Basically, we do need to see the richer countries, like Germany like Holland, spend some of their resource in propping up the weaker countries of the eurozone.

“Obviously it is difficult for them to do that, it is not a popular thing to do but it is absolutely necessary. I think there are signs that the eurozone are moving towards richer countries standing behind their banks and standing behind the weaker countries.

“It’s a reminder of why we are not in the euro, because I think British taxpayers would find these things difficult to stomach. But British taxpayers need to see the eurozone sort their act out if we are going to get sustainable growth and jobs.”

Mr Osborne said it was clear pressure imposed by non-eurozone G20 members, who see the problems of the single currency holding back the world economy and their own prospects, had an impact on the eurozone leaders.

But he cautioned: “I am not claiming that this summit has solved those problems but the eurozone is inching towards solutions.” Mr Osborne claimed Britain was seen as “part of the solution” by other G20 states because of its success in tackling deficits.