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Wow..just...wow ~ Reports that Germany and France have begun talks to break up the eurozone gu.com/p/339bf/tw via European debt crisis spiralling out of control
Reports that Germany and France have begun talks to break up the eurozone amid fears that Italy will be too big to rescue
Fears that Europe's sovereign debt crisis was
spiralling out of control have intensified as political chaos in Athens
and Rome, and looming recession, created panic on world markets.
Reports
emerging from Brussels said that Germany and France had begun
preliminary talks on a break-up of the eurozone, amid fears that Italy
would be too big to rescue.
Despite Silvio Berlusconi's
announcement that he would step down as prime minister once austerity
measures were pushed through parliament, a collapse of investor
confidence in the eurozone's third-biggest economy sent interest rates
in Italy to the levels that triggered bailouts in Portugal, Greece and
Ireland.
Italian bond yields surged through the critical 7% mark,
at one point hitting 7.5%, amid concern that the deteriorating situation
had moved the crisis into a dangerous new phase.
In Athens talks
to appoint a prime minister to succeed George Papandreou were in
deadlock, and will resume on Thursday morning. The Italian president,
Giorgio Napolitano, sought to reassure the markets by promising that
Berlusconi would be leaving office soon.
Angela Merkel, the German
chancellor, said the situation had become "unpleasant", and called for
eurozone members to accelerate plans for closer political integration.
"It is time for a breakthrough to a new Europe," she said. "Because the
world is changing so much, we must be prepared to answer the challenges.
That will mean more Europe, not less Europe."
The president of
the European commission, José Manuel Barroso, issued a new call for the
EU to "unite or face irrelevance" in the face of the mounting economic
crisis in Italy. "We are witnessing fundamental changes to the economic
and geopolitical order that have convinced me that Europe needs to
advance now together or risk fragmentation. Europe must either transform
itself or it will decline. We are in a defining moment where we either
unite or face irrelevance," he said.
Senior policymakers in Paris,
Berlin and Brussels are reported to have discussed the possibility of
one or more countries leaving the eurozone, while the remaining core
pushes on toward deeper economic integration, including on tax and
fiscal policy. "France and Germany have had intense consultations on
this issue over the last months, at all levels," a senior EU official in
Brussels told Reuters, speaking on condition of anonymity because of
the sensitivity of the discussions.
Financial regulators across
Europe were last night carefully monitoring the health of their heavily
exposed banks, amid concern that the turmoil could lead to a debt
default, or even the break-up of the euro.
George Osborne, just
three weeks away from delivering his autumn statement on the health of
the economy, believes Europe's problems are blighting the UK's growth
prospects, but he will use the sell-off of Italian bonds to insist there
is no alternative to his austerity plans.
Nick Clegg, the deputy
prime minister, spent Wednesday in Brussels urging the council
president, Herman Van Rompuy, and a clutch of EU commissioners to focus
on growth, and not further treaty changes, warning that if Europe does
not become more competitive it will end up in a spiral of perpetual
decline. Both he and David Cameron are urging EU integrationists to
recognise that EU Treaty changes in the next few months would be a
massive distraction and no cure for the underlying economic crisis. He
pointed out that they would require referendums in at least four
countries.
The latest chapter in the ongoing sovereign debt crisis
came as Bank of England policymakers gathered for their monthly two-day
interest rate-setting meeting. The monetary policy committee announced
£75bn-worth of quantitative easing last month in an effort to prevent a
recession.
City analysts believe the renewed turmoil in the
eurozone is pointing to a deep recession in Europe. "It's unavoidable
that there will be an outright contraction in the fourth quarter of this
year, and a 60%-70% chance of another decline in the first quarter of
next year," said Nick Parsons, head of strategy at National Australia
Bank.
Shares fell heavily on both sides of the Atlantic. The
Italian stock market lost 4% of its value. The FTSE100 index of leading
shares closed 106.96 points down, at 5460.38. The Dow Jones closed 389
points down at 11,780.94.
Christine Lagarde, head of the IMF, told
a financial forum in Beijing that Europe's debt crisis risked plunging
the global economy into a Japan-style "lost decade" of weak growth and
deflation.
"Our sense is that if we do not act boldly and if we do
not act together, the economy around the world runs the risk of a
downward spiral of uncertainty, financial instability and potential
collapse of global demand … we could run the risk of what some
commentators are already calling the lost decade."
Simon Derrick,
currency strategist at BNY Mellon, said: "We're at the point of asking
the question, if I put my money into Italy, am I going to get it back?
The fact is, there isn't a safety net." He added that the mood in the
City was reminiscent of Black Wednesday, in September 1992, when the UK
crashed out of the European Exchange Rate Mechanism.
The surge in
Italian bond yields was eventually capped by the European Central Bank,
which intervened in the markets to buy limited quantities of Italian
debt. But analysts say the ECB will eventually have to step up its
action, and act as a lender of last resort to bring interest rates down
to pre-crisis levels. Sony Kapoor, director of Brussels-based think-tank
Re-Define, said: "We may be fairly close to the point where an
existential threat to the eurozone, and hence the ECB, is on the
horizon. This could easily spiral out of control."
The ECB is seen
as the only institution with the firepower to rescue Italy, because the
EU lacks the resources to bail out such a large economy. Ben May, of
Capital Economics, said Italy would need a €650bn bailout to keep it out
of financial markets for the next three years or so. "The European
Financial Stability Facility will not be able to provide a bailout of
this size," he said.
Officials in Brussels insisted on Wednesday
there would be no rescue package for Rome, saying, "financial assistance
is not on the cards". A key test will come on Thursday morning when
Italy has to raise €5bn from investors on the bond market.
Economic
and monetary affairs commissioner Olli Rehn ratcheted up the political
pressure on Italy with a strongly-worded letter to finance minister
Giulio Tremonti. In it, Rehn demanded concrete written details of how
Italy will implement each of the 39 separate reform measures it has
promised to undertake.
In Rome the head of state, Giorgio
Napolitano, insisted that Berlusconi would be leaving office soon, and
that his departure would not be the prelude to a lengthy period of
political instability.
His intervention came after hurried
consultations with the speakers of both houses of parliament to ensure
the speediest possible approval for a package of economic reform and
austerity measures agreed with the European institutions. On Tuesday
evening, after losing his majority in the chamber of deputies,
Berlusconi told Napolitano he would resign.
But, to prevent the
economic measures being blocked by the fall of his government, he said
he would only go once the package had been approved.
As concern
grew that he might delay the passage of the legislation, which has
become a litmus test of Italy's credibility in the markets, Berlusconi
said he would insist on holding new elections and one of his ministers
speculated that could be next February.
After the yield on Italy's
benchmark bonds soared above 7%, taking interest rates to a level
beyond which previous euro zone debt crisis victims have sought a
bail-out, the president issued a statement to say the new economic
measures would be "approved in the space of a few days" and that there
was "no uncertainty over the prime minister's decision to resign".
Napolitano,
who cannot begin consultations with party leaders until Berlusconi
leaves office, said that either a new government would be formed "to
take every necessary decision" or an election would be held "within the
shortest time".
That would still mean a vote was not held until
January. But a source close to the president stressed to the Guardian
that "early elections are not a foregone conclusion."
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