Media playback is unsupported on your device Media caption Chancellor George Osborne: "Getting the economics right is absolutely necessary to persuade people of the merits of the EU"

The UK could be forced to quit the European Union if the organisation does not reform, George Osborne has warned.

The chancellor said it was essential to "protect the collective interests of non-eurozone member states" while the rest of the EU forged stronger links.

Without such reform, the UK might "face a choice between joining the euro or leaving" the EU, he said.

The 28-member group also had to do more to ensure economic competitiveness with rivals like India and China, he added.

Labour said David Cameron's "weakness" regarding his party was preventing reform, while the UK Independence Party said the prime minister had repeatedly "caved in" to Brussels.

Mr Osborne's speech followed the Conservative leadership rejecting a call from 95 of the party's MPs to allow Parliament to block EU laws which damage the national interest

'Simple choice'

Analysis There is no shortage of combustible material around at Westminster - and particularly for the Conservatives - when it comes to Europe. So George Osborne seemed to go out of his way in this speech to avoid wandering around with a box of matches. He stuck to the big picture theme on Europe for the Conservatives: European countries need to pull their fingers out because of the threat of global competition, and their club, the European Union needs a shake-up to boot. And in big picture terms, he has his party with him. It's the nitty gritty, the how and the when, where strongly held views differ. Labour reckons David Cameron and George Osborne are spending more time negotiating with their backbenchers than negotiating with Brussels. But Labour still has its own big decision to make - would it offer a referendum on EU membership if it won the election?

Earlier this week Foreign Secretary William Hague said the EU's rules had to be followed by all its members and the MPs' veto plan was unworkable.

But addressing the think tank Open Europe and the Fresh Start group of MPs, set up by Conservatives keen to see reform, Mr Osborne said he understood the need for change, especially given further economic and political integration by EU countries within the eurozone, aimed at preventing a repeat of the recent crisis.

He warned: "If you cannot protect the collective interests of non-eurozone member states, then they will have to choose between joining the eurozone, which the UK will not do, or leave the European Union."

He also said: "I believe it is in no-one's interests for Britain to come to face a choice between joining the euro or leaving the European Union.

"We don't want to join the euro, but also our withdrawal from a Europe which succeeded in reforming would be bad for Britain. And a country of the size and global reach of Britain leaving would be very bad for the European Union."

'Status quo risk'

The Conservative Party has promised an in-out referendum on EU membership - following a renegotiation of powers with Brussels - before the end of 2017, if it wins a majority at the next general election.

Mr Osborne said: "The biggest economic risk facing Europe doesn't come from those who want reform and renegotiation.

Image copyright Reuters Image caption EU chiefs have warned against "scaremongering" over immigration

"It comes from a failure to reform and renegotiate. It is the status quo which condemns the people of Europe to an ongoing economic crisis and continuing decline."

Mr Osborne argued there was a "simple choice for Europe: reform or decline".

He said: "There are those who throw their hands up and say 'We can't reform Europe'. To them, I would say that we have already proved that wrong.

"Take the EU budget. Last year, the prime minister negotiated the first ever real-terms cut... Far from being a lone voice, we were working with like-minded countries like Germany, the Netherlands and Denmark."

Mr Osborne talked about how the 2008 financial collapse had exacerbated the EU's problems, but argued: "We knew there was a competitiveness problem in Europe before the crisis.

"But the crisis has dramatically accelerated the shifts in the tectonic economic plates that see power moving eastwards and southwards on our planet."

He said too much money was going on benefits across the continent: "Europe accounts for just over 7% of the world's population, 25% of its economy, and 50% of global social welfare spending."

'Utter bunkum'

The Conservative leadership seems to be spending more time negotiating with their backbenchers than negotiating with Europe to deliver real reform. Douglas Alexander, Shadow foreign secretary

In a question-and-answer session following his speech, Mr Osborne said the Conservatives were "having a grown-up conversation" on Europe, adding: "I would rather be in a party that's addressing these issues for the future than a party that's burying its head in the sand."

But, for Labour, shadow foreign secretary Douglas Alexander said: "The Conservative leadership seems to be spending more time negotiating with their backbenchers than negotiating with Europe to deliver real reform.

"All of us know change in Europe is needed, but the tragedy is that David Cameron's internal party weakness is preventing him from approaching the need for reform in a sensible way."

UK Independence Party leader Nigel Farage called the idea that the UK could lead reform within Europe "utter bunkum".

He added of Mr Cameron: "The EU is not going to suddenly turn around and be dictated to by a man...who has given away any leverage in the negotiations he may have had by declaring his support for EU membership."

'Compelling'

The CBI business group said Mr Osborne had set out a "compelling" case for EU competitiveness.

But European Commission President Jose Manuel Barroso warned of "scaremongering" about the right of EU citizens to live and work elsewhere in the union following recent suggestions by David Cameron that restrictions should be considered in future.

He told the European Parliament that the principle was "good for all of us that enjoy freedom in Europe and have an open idea of Europe and not a narrow, chauvinistic idea of the protection of the different countries".

Earlier on Wednesday, it emerged that the Home Office has delayed a report into the issue amid reported disagreements in the coalition.