Warnings over Greece eurozone exit

George Osborne has warned of dire consequences if Greece leaves the eurozone without an "ambitious" plan to deal with the fallout.

The Chancellor again suggested that so-called "Grexit" might be the only way to force fundamental reform in the currency area.

But allowing the struggling country to leave before measures were in place to contain contagion would be the "worst case for everybody".

The comments, in Mr Osborne's annual speech to bankers at the Mansion House, came after interest rates on Spanish bonds hit fresh highs - sparking fears about the country's ability to service debts.

Senior German figures also played down the prospects of compromise on the key issue of closer financial integration.

Chancellor Angela Merkel cautioned world leaders against "overestimating" her nation's ability to resolve the crisis.

And her deputy finance minister Steffen Kampeter dismissed "Eurobond-lite" proposals for pooling part of members' debts.

Mr Osborne said that without greater fiscal integration "the economic and political strains of deleveraging and balance sheet repair in the eurozone periphery may prove unbearable".

The solution had to involve stronger countries agreeing to help weaker ones, more pooling of resources, and a "shared backstop" for the banking system.

"The political paradox Europe faces right now is this: some or all of these things are needed for the existing countries in the eurozone to make their currency work, but it may take Greek exit to make it happen," he said.

"That is a decision for the eurozone and the Greek people.

"One thing is for sure: if exit is the chosen route then the eurozone must have a very good plan in place to prevent contagion.

"The worst case for everyone would be exit without a sufficiently ambitious response.

"But carrying on with the current uncertainty and instability is not much better.

"A time for decisions has come."

Mr Osborne said the risks to Britain from a "disorderly collapse" of the euro were "huge".

The economic conditions were "as difficult perhaps as any our country or our continent has faced outside of war".

However, he rejected the idea that the UK should participate in banking union to help stabilise the financial system in the currency bloc.

"British taxpayers will not stand behind eurozone banks, and British voters want the British authorities to be in charge of supervising our own banks, especially in a crisis," the Chancellor said.

He insisted the Government would also continue to seek safeguards for the single market as eurozone integration became deeper.

"We want to remain full and active members of the EU single market, which has huge benefits for our economy," Mr Osborne said.

"Indeed we want to deepen and enhance the single market.

"But the rules that govern that single market must continue to be determined by all 27 members of the EU, and not just by the 17 members of the eurozone."

Shadow chancellor Ed Balls attacked Mr Osborne over his remarks about a possible Greek exit from the eurozone.

"I was at the Mansion House last night (Thursday) and there was a frisson around the room when our Chancellor started openly talking about whether Greece should leave the eurozone. I do not think that is a very wise or sensible thing to do," he told BBC Breakfast.

"I think Greece has got to sort out its issues - and that is a matter for Greece. What I am really worried about in the eurozone is that countries like Spain or Italy - which are huge, to which we as a country are very exposed - they have not sorted out their problems."

He added: "Unless we get a global growth plan going including in the eurozone you can't turn this round.

"I am afraid that our Government seems to be urging the wrong actions in Europe as it takes the wrong actions here in Britain too."

Meanwhile, Gordon Brown said the prospect of a "chaotic" Greek eurozone exit is becoming more likely regardless of the outcome of crucial elections in the country on Sunday.

The Labour former prime minister warned the single currency was reaching a "day of reckoning" and suggested France and Italy would follow Spain in needing a bailout as the eurozone crisis deepens.

Mr Brown issued a stark warning that the Mexico talks, which start on Monday, are the "last chance" to sort out the turmoil.

In an article for news agency Reuters he claimed even German banks may need extra capital.

"Whichever way the Greeks vote in Sunday's election, a chaotic exit from the euro is becoming more likely: Its tax revenues are collapsing, not rising as promised," he wrote.

"Unable to regain access to markets, Portugal and Ireland will soon have to ask for their second IMF programs.

"Sadly Italy - and potentially even France - may soon follow Spain in needing finance as the European recession deepens. Even German banks, which are some of the most highly leveraged, are not immune from needing more capital."

He added: "This newly discovered but elemental characteristic of an economic union - that a lender of last resort is essential - will have to be acknowledged for Spain, Italy and possibly even France as well as for Portugal and Ireland and for Greece, too, if they stay in the euro."

The eurozone crisis will dominate next week's G20 meeting in Mexico, which begins on Monday - the morning after the re-run elections in Greece.

Eurozone leaders including German chancellor Angela Merkel, French president Francois Hollande and Italian prime minister Mario Monti are expected to delay their travel to the Pacific resort of Los Cabos until Monday in order to be in place to deal with the immediate aftermath of the Greek poll results, expected to be declared late on Sunday.

The 13-hour flight to Mexico means that the leaders will be in the air as the markets respond to the results on Monday morning, though Mr Cameron will be in touch with London via satellite phone.

Germany is expected to come under intense pressure from G20 members outside the eurozone to take decisive action to stabilise the single currency by pushing forward with moves towards fiscal union.

Mr Cameron and Chancellor George Osborne have been saying for several months that the "remorseless logic" of monetary union means closer fiscal integration for the 17 eurozone states.

But Berlin is resisting proposals such as eurobonds, which would spread the risk from debt across the entire eurozone, effectively allowing wealthy Germany to underwrite the debts of countries like Greece and Spain.

Ms Merkel on Thursday cautioned world leaders against "overestimating" her nation's ability to resolve the crisis.

No resolution to the eurozone crisis will emerge from Los Cabos, but it is expected to provide an important staging post towards a settlement of some kind at the European Council meeting in Brussels on June 28.

After the video conference between Mr Cameron, Mrs Merkel, Mr Monti, Mr Hollande, Mr Barroso and Mr Van Rompuy, a Downing Street spokesman said: "European leaders attending the forthcoming G20 in Los Cabos participated in a video conference call this afternoon.

"The EU's priorities for the upcoming meeting include ensuring effective co-ordination at the global level for strong, sustainable and balanced growth and the implementation of the G20 commitments on financial market reform.

"Leaders agreed the need for countries to continue to take the necessary action to secure global economic stability and to support growth. These issues will be the focus of discussions at the G20 meeting, which immediately follows the Greek elections, and at the next European Council on 28-29 June."