London: France and Italy may need massive bailouts, as the euro approaches its 'day of reckoning', Gordon Brown warned last night.
The former Prime Minister, who played a key role in co-ordinating global action in response to the Credit Crunch, accused European leaders of failing to rise to the challenge of the crisis - and warned that Europe could be facing a 'lost decade'.
In a hard-hitting article for the Reuters news agency, Mr Brown said the European economy was in a 'downward spiral that shows no sign of ending'.
He said Greece was likely to suffer a 'chaotic' exit from the euro regardless of the result of Sunday's elections, with a string of other countries likely to suffer serious financial contagion as a result.
He warned that Europe's banks may need a further £400 billion in emergency funding.
Writing on the eve of the G20 Summit in Mexico, Mr Brown urged world leaders to bring forward radical proposals to stave off the threat of collapse.
'The standard, but often empty, language of summit communiqués will simply not do when the euro area is finally approaching its own day of reckoning,' he said.
'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.
'Unable to regain access to markets, Portugal and Ireland will soon have to ask for their second IMF programmes (bailouts).
'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.'
Today, the International Monetary Fund sounded a warning note over Spain, telling the country's leaders they should raise taxes and slash government workers pay to narrow the budget deficit.
The international lending group said the Spanish deficit is likely to exceed estimates and the government should therefore consider several measures to boost tax revenue.
An IMF report suggested that Spain raise VAT and eliminate a a deduction on mortgage payments for first-time homebuyers, which was recently reintroduced.
Spain's Prime Minister Mariano Rajoy has resisted increases in the VAT. The previous government boosted it to 18 per cent in 2010, though it remains one of the lowest in Europe.
Spain set a goal of reducing its deficit to 5.3 per cent of gross domestic product, or GDP, in 2012. The IMF report called that goal 'very ambitious' and said it would 'likely be missed.' It also criticised Spain in unusually blunt terms for missing its target in 2011.
European leaders agreed last weekend to provide Spain's government with a loan of up to $125billion to bail out its ailing banks. The prospect of either France or Italy needing bailouts would raise questions about whether the euro could survive.
Mr Brown accused European leaders of having a 'one-dimensional obsession' with cutting budget deficits and national debt. He said this had led them to ignore the continuing 'seismic tremors' in the banking industry, as well as stalling a return to economic growth.
Independent analysis of Spain's debts suggested they were so huge that they 'cannot be repaid on any normal timetable'.
Mr Brown said only greater fiscal union, with a single European lender of last resort could save the euro.
In a blunt warning to world leaders, he said: 'If there is a failure of global leadership next week, not only will Europe be condemned to a lost decade but the whole world will pay a fearful price.
'The lesson I learned in 2009 is that when a problem escalates into a global problem, you need a global solution.'
