In case anyone wondered about the state of the euro

In a speech to business leaders in the North West today, Cameron will say:

"The eurozone is at a crossroads. It either has to make up or it is looking at a potential break-up....Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden-sharing and supportive monetary policy across the eurozone...Or we are in uncharted territory which carries huge risks for everybody." 

Alongside remarks from Bank of England chief Mervyn King that the euro is "tearing itself apart", this has triggered a lot of excitement amongst the UK media (montage: Tim Montgomerie):

This, of course, was just in case anyone was still uncertain as to what shape the euro was in (and needed Cameron to remind them)...

Britain's growth: Europe remains the X factor

Conservative Home has launched a "growth manifesto" with contributions from a number of UK thank-tanks with the aim of providing ideas for how to return Britain to growth ("Here you go George; A Growth Manifesto from London's think tanks", is how the piece is aptly titled). 0.2% second quarter GDP growth is hardly impressive so ideas are certainly needed.

We've chimed in with our own thoughts, focusing on a long-term solution to the eurozone crisis in combination with pro-growth, liberalising measures in Europe (save on capital requirements for banks, where tougher regulation is needed). Like Mervyn King and others, we believe that the eurozone crisis remains the biggest threat to the UK's financial stability. But as we argued in the Sunday Telegraph last week, amid fears of another nasty economic downturn in Euroland - and the contracted demand for UK exports that comes with it - the crisis and the measures in its wake are also a direct threat to UK growth.

In fact, a large-scale meltdown in the eurozone could send the UK straight back into recession. The point being that fudging it - which EU leaders are currently doing - is a risky strategy. Here are our thoughts:

The Government needs to push for a long-term solution to the eurozone debt crisis – bailouts aren’t working, debt restructuring will be needed. The longer the crisis goes on, the worse the prospects for eurozone growth and stability look and, as our biggest trading partner, this will have an impact on the UK economy. In the medium-term the UK needs to seek allies in pushing for a better-functioning single market, including deregulation, removing cross-border barriers to services and digital industries, and protecting the interests of the City of London from the EU’s new financial supervisory architecture. This includes securing the flexibility to apply capital requirements for banks as the UK sees fit. In the longer term, the UK should look to diversify its trade away from the eurozone, tapping into the growth potential of emerging markets, which will be necessary in any case but also provides a Plan B if the eurozone fails to get its act together. The UK also needs to continue to push for a reduction in EU external trade barriers and encourage the expansion of free trade agreements with other economies/trading blocs.

King vs the ECB - and Cameron's salient point

The Bank of England today released their latest Financial Stability Report, with governor Mervyn King making some interesting comments about the on-going eurozone crisis, saying:

"Sovereign and banking sector strains in some vulnerable euro-area economies were the most material and immediate threat to UK financial stability"

OK, really worrying but not new. However, then he goes on to say:

"Right from the start of this crisis, people wanted to believe it was a crisis of liquidity and we need to accept it's a crisis based on the build-up of large amounts of debt…The belief that we lend a bit more will never be an answer but it can buy more time to put in place a fundamental solution."

So, essentially Mr King is pointing out that weaker eurozone members suffer from a pretty severe solvency problem - not a liquidity on. It's hard not to interpret this as an outright criticism of the EU leaders' and the ECB's current bail-out strategy. Adding even more debt to the mix, won’t change anything (other than possibly buying a bit of time).

This is interesting stuff. Not only because it’s a different take to that of of the UK government - which has been peddling non-controversial statements over the last few weeks. But also because it puts him squarely on a collision course with the ECB.

And the thing is: King is absolutely right.

Moreover, when you combine the two quotes above, it suggests that the UK should be pushing for another approach to the crisis, outside of more bailouts.

The Prime Minister’s response to King's comments, coinciding with the conclusion of the EU summit, was broadly positive as well. There was some spin surrounding the EU summit of course - the played up dispute over the UK’s involvement in the second Greek bailout, as well as spats over asylum policy. Meanwhile, journalists are having a field day with Herman Van Rompuy's new, ridiculous egg-like Council headquarters (costing a mere €240 million, €100,000 only for the brochure apparently - seriously, does he not have anyone who can help him on the communication front? Or is this man running his communication efforts as well, which would perhaps explain it?).

But David Cameron did make some important comments over bank capitalisation, which actually have huge relevance for the eurozone crisis - and the efforts to find a way out of this mess:

"As I have said, and secured in these Council conclusions, we need to make sure all our banks are being strengthened in terms of their capital reserves and what they can withstand…I am confident that that is taking place in the UK. We need to make sure it takes place right across Europe and I think that's absolutely vital and what Mervyn King is saying is right."

So, despite not saying that he agreed with King’s assessment of the eurozone crisis, Cameron made it clear he’s not going to allow the watering down of the new Basel III regulations anytime soon. That should at least put banks towards the path of being able to absorb any losses when the current bailout approach comes crashing down.

As one of the eurozone's biggest weaknesses is its under-capitalised banks, the importance of Cameron's call can hardly be over-stated.