Yorkshire businesses face being crippled by euro split

Markets shuddered yesterday following reports of secret Franco-German talks about plans to radically overhaul the European Union and force smaller countries out of the eurozone.

David Cameron urged the continent’s leaders and the European Central Bank to make firm decisions fast to save their currency, while continued uncertainty over Italy’s leadership prompted the International Monetary Fund to demand more “political clarity” from countries in crisis.

France and Germany strongly denied suggestions that they were plotting to create a “two-speed” Europe in which eurozone countries move ahead faster than the 27 EU nations as a whole.

But the speculation only served to increase concern on a day when the European Commission slashed its growth forecast for the UK this year from 1.1 per cent to 0.7 per cent.

The commission also revised its forecast for the 17-country eurozone and warned it could slip into “a deep and prolonged recession” as early as next year.

Yorkshire experts fear a split between stronger and weaker eurozone countries would hit UK exports and have a damaging impact on the regional economy.

York University professor Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said forcing countries out of the single currency would lead to devaluation.

“We are already looking at a situation of massive uncertainty in which nobody in their right mind is making any serious big investment decisions,” he said, “and a situation in which European banks are cutting down on credit growth.

“The transition to such a system would be excruciatingly difficult. These countries would devalue against the pound and we would lose what little advantage we have gained from our devaluation.

“Exports would be hit. Then investment goes on hold. Let’s just hope it doesn’t happen.”

The chairman of the York and North Yorkshire Local Enterprise Partnership, Barry Dodd, said the region’s companies needed a swift resolution to the crisis.

“What business lacks at the moment is real confidence in the future and that restricts investment decisions,” he said. “This won’t help to build confidence.

“The eurozone is Yorkshire’s biggest export market, and if you are thinking about investing in new plant as a manufacturer you will think about hanging back a bit.

“That’s exactly what we don’t need for the regional economy and it augurs badly for the future.”

Reports yesterday quoted an unnamed senior EU official in Brussels, who claimed discussions between France and Germany had explored the possibility of setting up a more integrated eurozone with one or more countries leaving.

“We need to move very cautiously,” the source said, “but the truth is that we need to establish exactly the list of those who don’t want to be part of the club and those who simply cannot be part.”

Mr Dodd, chief executive of the Wetherby-based service and manufacturing group GSM, said: “I think a two-speed Europe will make it more difficult for all of us because then we won’t be exporting into a single market.

“Having a eurozone and a non-eurozone will not help exporters at all.

“There is another problem. My own company’s biggest export market is Germany and most of what we make is then exported in other products.

“If there is a two-level Europe made of euro countries and non-euro countries, it will make German exports less competitive.”

The crisis has escalated in recent weeks as economic and political problems in Italy and Greece have become clearer.

Mr Cameron said Italy’s state was a “clear and present danger” to the eurozone and it was “a very alarming time for the world economy”.

He added: “It is not in our interests for the eurozone to break up, for countries to leave the eurozone.

“We have to keep the British economy safe, to take the British economy through this storm. That means preparing for all eventualities.”