- Eurozone finance ministers insist £635 billion bailout fund is big enough to deal with debt crisis
- Irish budget debate begins in Dublin
- Debt-laden government’s £5 billion cost-cutting package to slash social welfare
The Euro is at risk of collapse as economic crisis sweeps the continent, Britain’s independent Treasury watchdog warned last night.
‘General consensus’ is that currency unions ‘eventually fail’, Professor Steve Nickell, a senior member of the Office for Budget Responsibility, told MPs on the powerful Treasury Select Committee.
And the OBR’s chairman, Robert Chote, added: ‘We are not assuming a cataclysmic outcome for the eurozone but, as Steve said, monetary arrangements come and monetary arrangements go.’
The admission by the leading economists came as eurozone finance ministers held an emergency meeting in Brussels to discuss possible measures to shore up the single currency.
Greece and Ireland have already been forced to accept bailouts – with Britain making its own £3.2billion direct loan to Ireland.
There are fears Portugal and Spain may be next to go cap in hand for assistance from the EU and the International Monetary Fund.
Professor Nickell added: ‘Of course there is a possibility it will collapse, but at the moment it is not something to which I would assign a high probability.’
Both he and Mr Chote warned that the OBR had not incorporated into its forecasts any attempt at working out what would happen to the UK economy if the euro imploded.
Prof Nickell, a former member of the Bank of England’s Monetary Policy Committee which set interest rates, said he ‘would be quite happy’ to do so ‘if we felt it was a real concern’.
The OBR may have to take into account ‘very low’ growth in the eurozone in its next forecasts before the March 23 budget, he added.
Mr Chote also denied that the OBR’s forecasts for the UK economy were too rosy.
In its report last month it revised upwards its prediction for growth for 2010 to 1.8 per cent from 1.2 per cent.
Mr Nickell added that he believed it ‘very unlikely’ there would be further dramatic falls in house prices.
Meanwhile, top European officials yesterday insisted they have enough financial firepower to deal with Europe’s government debt crisis – but they id not rule out increasing the bailout fund in the future.
Jean-Claude Juncker, who chaired a meeting of the eurozone’s 16 finance ministers on Monday, said that there wasn’t any immediate need to increase the £635 billion financial backstop despite concerns that it just isn’t enough.
The fund is for eurozone governments in danger of running out of money.
‘For the time being, there’s no need to increase,’ Juncker said after the meeting.
The big fear in the markets is that Portugal and Spain will join Greece and Ireland in needing a financial lifeline – and that Europe might not have enough bailout money available to cope.
In May, eurozone governments and the International Monetary Fund set up the giant financial backstop for the currency bloc.
The majority is managed by the European Financial Stability Facility, which can issue up to £332 billion in bonds guaranteed by eurozone governments.
The EU’s executive Commission can lend an additional £50 billion, while the IMF has said it would contribute up to £211 billion.
The idea behind the facility was to reassure bond markets that countries would be able to pay – and halt the selloff of government bonds.
Klaus Regling, who heads the EFSF said that Ireland’s £72 billion bailout agreed last month will use up less than 10 per cent of the total backstop.
‘There are sufficient resources left to deal with other relevant cases,’ Regling said.
In Ireland, the Government unveiled the most feared budget in living memory.
The massive £5 billion cost-cutting package slashed social welfare, including jobseekers and child benefit.
Government ministers’ salaries will be cut as the government takes on a four-year battle to restore the state’s crippled finances.
Public spending will be reduced by £3.8 billion while taxes will raise an extra £1.3 billion.
Prime minister Brian Cowen’s shaky coalition will try to impose the cuts with only a two-seat majority.
But the embattled government received a boost yesterday after an independent TD, whose support is crucial, said he would back the cuts.
Michael Lowry, Tipperary North TD, said he would put the country first despite a potential backlash from his constituents.
The veteran politician said that after talks with the government he was satisfied that the old-age pension would be protected, along with free travel and electricity for the elderly.
Mr Lowry said his fellow backbench independent, Kerry’s Jackie Healy-Rae, was also expected to back the budget, due to be unveiled in the Dail by finance minister Brian Lenihan mid-afternoon.
The potentially savage package comes just over a week after the government revealed it was taking an £72 billion bailout from the International Monetary Fund/Europe.
Mr Cowen’s crippled coalition government has suffered widespread criticism for the move by a public angry at the perceived surrender of the state’s hard-won economic sovereignty.
The six billion euro package is the first phase of a four-year budgetary road map to raise £13 billion and plug the gap in the beleaguered economy.
Opposition party Sinn Fein accused Mr Lowry and Mr Healy-Rae of engaging in the worst kind of parochial politics.
Any potential excise and duty changes, including the price of petrol and alcohol will come into force from midnight and will have to be voted on in the Dail after the budget is unveiled.
The Social Welfare Bill, which gives legal effect to any budget changes in the dole or child benefit, is expected to be voted on by the end of the week while the finer details of the plan will be debated in the Finance Bill in the new year.
The budget marks the fourth time since October 2008 that the Fianna Fail/Green Party coalition government has been forced to introduce harsh measures to tackle the black hole in the public finances.
Lobby groups made a last ditch plea to Mr Lenihan to either save or make specific cuts, with the Irish Heart Foundation calling for a hike in the price of cigarettes.
But businesses said any price jump would lead to a corresponding increase in smuggling and damage retailers.