Cameron demands ‘make-up’ or ‘break-up’ but will eurozone agree?

Britain's Prime Minister David Cameron delivers a speech on the economy at the Institute of Directors in Manchester, northern England May 17, 2012. (Reuters / Nigel Roddis)
Britain's prime minister has called for the 17-member eurozone to support deficit cuts or face collapse. But this demand is unlikely to garner much support from France and Germany.

­David Cameron emphasized that the EU is now seeing the return of a crisis "that never really went away”, with Greece being on the brink of collapse and the survival of the euro in question. He insists his prescribed course of action is the right one, while admitting it will not be easy, requiring as it does spending cuts and tax rises.

Cameron cited Britain's "responsible fiscal policy" of cutting spending and increasing taxes as an example, saying that it allowed the Bank of England to pursue an active monetary policy to support the wider economy.

“The eurozone is at a crossroads. It either has to make-up or it is looking at a potential break-up,” he said in a speech to business leaders in Manchester.

The British prime minister made it clear that the UK could not be "immune from the consequences of a collapse" of the euro. However, he admitted that his message would be unpopular in Europe, which is frustrated by the UK‘s refusal to support a fiscal treaty last year.

Back then, the 17 members agreed to tougher fiscal discipline, but the UK, which is now essentially suggesting the same, abstained, fearing that tough fiscal limits would hamper the economic development of the country.

EU core states, particularly Germany, France and Britain, now appear to increasingly diverging with regard to their approaches to tackling the expanding debt crisis. While the UK insists on more cuts and higher taxes, French President Francois Hollande is promising his people he will focus on growth and renegotiate the eurozone’s fiscal pact, which requires deficit-cutting austerity measures. Hollande says that the British treat the EU like a self-service restaurant. 

With France and the UK obviously taking contradictory positions, Germany is trying to play a safer game saying neither "yes" or "no" to both approaches. While Hollande says he wants “growth” instead of austerity, Merkel, who backed the then-president Nicolas Sarkozy in the French elections, argues that growth needs to be generated by structural reform instead of relying on greater government spending.

Even though Germany and France seemed to have found common groun – Hollande and Angela Merkel stated that compromise between the eurozone’s largest economies is possible – no concrete solution has been suggested yet.

While many blame its debt-stricken members for what Cameron calls the mess in the eurozone, the absence of any obvious solution from the major players is only prolonging the agony. This is what really “tears the eurozone apart,” said the Bank of England’s Mervyn King on Wednesday.

­'Radical measures' for desperate times

Robert Oulds, the head of the policy-watching Bruges Group in London, thinks it is the growth imbalance that is causing problems for the eurozone.

“The European leaders aren’t really doing what’s necessary to generate economic growth within the eurozone and within the European Union. There is a major problem with the euro, but that needs an [orderly] dismantling,” he told RT. “The problem within the European Union and the eurozone is a problem of growth, and the imbalances are caused by Germany.”

Oulds believes that Europe’s biggest economy cannot afford to have a currency union with many different troubled economies which require different approaches to solving their problems and different fiscal policies.

“But Germany and the European Central Bank are forcing on countries like Greece and Spain and Italy and Portugal, as well as other countries such as Ireland, austerity, cutbacks coupled with tax rises which have hurt economic growth,” he explained.

These economies are already uncompetitive, and their depression only deepens as a result of being a part of the eurozone, Oulds continued.

“Something radical needs to happen, otherwise there will be more of the same – and the same is a declining economy with ever increasing numbers of unemployment,”

he concluded.