Germany and France were last night put on notice of a credit downgrade to 15 eurozone nations hours after unveiling their plan for greater fiscal union for single currency countries.
The eurozone countries – including the six that still have gold-plated AAA ratings like Britain – were told there was a 50-50 chance of a downgrade by Standard & Poor’s, one of the world’s three big ratings agencies
Such a move could force up their borrowing costs and push the euro even closer to collapse. It sent shockwaves through financial markets and will prompt speculation that the single currency is entering its ‘endgame’
Scuppered on the brink of a deal? Nicolas Sarkozy and Angela Merkel
The leaders of France and Germany joined forces to call for a blueprint that would automatically punish countries that use the euro if they violate tough budget rules.
France and Germany are proposing automatic penalties for nations breaking budget rules, monthly eurozone summits until the economic crisis is contained and a permanent EU bailout fund.
With fears over the failure of EU nations to get to grips with their debts threatening to engulf the single currency, EU president Herman Van Rompuy is warning the ‘survival of the euro’ will be at stake at a crunch summit starting on Thursday.
Last night S&P put Germany, France, the Netherlands, Austria, Finland and Luxembourg on a ‘creditwatch negative’ warning, meaning their prized AAA ratings could be cut to AA+ within 90 days, according to EU sources.
EU nations with lower ratings were warned of further downgrades. The move – and in particular the inclusion of Germany – sparked panic in the financial markets and the euro slammed into reverse having spent much of the day in positive territory.
Cameron again rejected calls for a referendum on Britain's future in the EU
Louise Cooper, markets analyst at BGC Partners, said: ‘We are drowning in a sea of eurozone sovereign debt and the market is worried about Germany underwriting the whole of the eurozone.’
Economic output in the region would fall by 5 per cent, according to the report, tipping Britain back into recession with a slump of 1 per cent in 2012 and 0.2 per cent in 2013.
The warning from Standard & Poor’s was a setback for Angela Merkel and Nicolas Sarkozy as they sought to ramp up pressure on David Cameron to agree to an emergency EU rescue treaty.
The Prime Minister again rejected calls for a referendum on Britain’s future in the EU despite French and German demands for a fresh power grab by Brussels.
In a nightmarish twist for the Prime Minister, Mrs Merkel and Mr Sarkozy declared that they plan to ask every member of the EU, including the UK, to sign up to a new European treaty at a summit later this week – and press ahead on their own if any say no.
Their pincer movement leaves Mr Cameron in the difficult position of either having to infuriate Tory MPs by allowing them to go ahead, or being blamed by other EU leaders for risking an economic catastrophe across Europe if he puts obstacles in their path.
Downing Street said the priority had to be stabilising the eurozone, rather than using negotiations to try to repatriate powers from Brussels to Westminster at this stage.
Mr Cameron insisted the proposals would not warrant a referendum in the UK because they would only apply to countries in the euro.
‘We have legislated now so that it is impossible for a British government to pass power from Britain to Brussels without asking the British people in a referendum first,’ he said.
‘As Prime Minister I am not intending to pass any powers from Britain to Brussels, so I don’t think the issue will arise.’
His position sets him on a collision course with Eurosceptic MPs in his own party, who insist standing back and allowing the eurozone to move towards fiscal and political union is acutely dangerous for the UK.
Tory Eurosceptic Bill Cash, who chairs the Commons European scrutiny committee, said: ‘This is a major treaty change whether it is for the eurozone 17 or the EU 27, because it fundamentally changes the relationship of Britain to the European Union,’ he said. ‘It therefore requires a referendum.’
Tory MP Conor Burns said: ‘This is the opportunity finally to get the British dog out of the federalist manger.’