25/05/2012 12:15 BST

Eurozone Collapse Must Not Cause UK To Abandon Cuts, Say Tories

Britain risks ending up like Greece if the Government abandons its cuts programme in response to the collapse of the euro, a report by Conservative backbenchers warned today.

The paper from the Free Enterprise Group set out a "Plan E for Eurogeddon" under which the Government would respond to a Greek exit from the single currency by reaffirming its determination to drive down the deficit and introduce a raft of labour market reforms to make it easier for firms to hire workers.

The group warned that Labour's Plan B fiscal stimulus package of tax cuts and state spending to boost growth and jobs would be "the worst response" Britain could make to the debt crisis in the eurozone.

Greek exit, with possible knock-on contagion in Spain, Portugal, Ireland and Italy, would have a "severe impact" on the UK and there would be "no room for fiscal stimulus", said the report, authored by Tory MPs George Eustice, Kwasi Kwarteng, David Ruffley and Liz Truss.

In response, the Government should renew its deficit-reduction drive by announcing a freeze on benefits and considering a £20,000 annual cap, they said.

Investment bonds should be issued to take advantage of capital flight from the euro area to the "safe haven" of sterling.

These could direct private funding to job-creating infrastructure projects such as additional runways in south-east England, new nuclear power plants or a railway freight line linking the Channel Tunnel to the north of England. Foreign cash could also be used to recapitalise banks.

Meanwhile, labour market reforms should include a freeze on the minimum wage and the removal of health and safety and maximum hours regulations for under-18s, coupled with the abolition of national insurance for low-paid workers, said the report.

To boost job prospects for younger, older and returning workers, the Government should introduce German-style "flexi-jobs" paying less than £10,000 a year, which would be exempt from tax and employment regulations.

The MPs called for smaller firms to be exempted from unfair dismissal regulations and for the Government to bring forward the planned introduction of employment tribunal fees by a year to 2013, to remove the "fear factor" that deters businesses from taking on staff.

Lib Dem business minister has said that so-called "fire at will" employment laws had very little impact on job creation, even among micro-businesses.

Speaking to The Huffington Post UK he hinted that the Tories' belief that relaxing the rules would create jobs was based on dogma, rather than any actual evidence.

They called for a £50,000 cap on claims for unfair dismissal, which is currently capped at £72,000, and discrimination, which is unlimited.

"The failure of the euro would be a significant moment in economic history," said the report, entitled Plan E: Preparing for Euro Exit.

"To maintain confidence, Britain would need to reaffirm its commitment to deficit reduction and signal new measures to boost growth. Further fiscal stimulus would be counterproductive, and do nothing to restore Britain's long-term growth.

"We should learn the lessons both from those in the eurozone which have failed and those which have prospered.

"Fail to reform or cut spending and Britain could eventually end up like Greece. Embrace reform and flexibility and we could enjoy the competitive success of a Germany."

The Free Enterprise Group is made up of around 40 Conservative MPs from the free-market right of the party, most of most of whom were first elected in 2010.

Christine Lagarde, the head of the IMF, has warned that Britain needs to prepare a Plan B for its economy, including the Bank of England cutting interest rates and injecting more money into the economy though quantitative easing