European governments and the European Union’s executive commission have tried to quash reports of a possible shrinking of the eurozone, as debt worries and political uncertainty in Greece and Italy continued to feed financial turmoil.
German Chancellor Angela Merkel on Thursday rejected the idea that her government might favour a smaller eurozone after Reuters reported that German and French officials had informally discussed creating a smaller, more integrated single currency area.
“For months, since the very beginning of the euro debt crisis, Germany has had only one goal, that is to bring about a stabilisation of the eurozone in its current form, to make it more competitive, to consolidate budgets,” said Merkel.
“And we firmly believe that this common euro area is capable of winning back full credibility, including every single country.”
A French source also said there were no plans to shrink the 17-nation bloc, despite comments by French President Nicolas Sarkozy on Wednesday regarding a possible “two-speed Europe”.
Sarkozy’s articulation of an integrated eurozone bloc and a looser group of non-single currency EU members was interpreted by some as meaning that some existing members may have to quit the single currency.
Austria’s foreign minister, whose country also uses the single currency, also said the eurozone needed to stay together.
“We have a eurozone with 17 members and we have to stay together just to give the market a strong signal that we will overcome the problems and not create new problems,” said Michael Spindelegger.
|Deep-seated economic problems are spreading beyond Greece and Italy to the rest of the eurozone [EPA|
Stock markets and bond markets in Europe have been reeling from days of uncertainty over eurozone debt, with Italian bond yields rising sharply on fears that the bloc’s third biggest economy could be heading towards defaulting on debts totalling 1.9 trillion euros ($2.6 trillion).
Italian 10-year bond yields eased a little on Thursday, following Italian President Giorgio Napolitano’s statement that a new government and emergency economic measures would be in place within days, but continued to trade around the seven per cent level considered unsustainable beyond the short term by economists.
European shares mostly fell in choppy trade as uncertainties over the selection of a new leader in Italy added to investors’ jitters, with Germany’s Dax up 0.66 per cent, France’s CAC down 0.34 per cent and London’s FTSE down 0.29 per cent when trading closed on Thrusday.
‘Moment of truth’
Jose Manuel Barroso, president of the European Commission, issued a stark warning of the dangers of an economic split in the European Union, which consists of the 17 members of the eurozone and 10 other countries.
“There cannot be peace and prosperity in the north or in the west of Europe, if there is no peace and prosperity in the south or in the east,” Barroso said in a speech in Berlin late on Wednesday.
But David Cameron, the British prime minister whose country has remained outside the single currency, said on Thursday that the eurozone was in danger and faced an approaching “moment of truth”.
“If the leaders of the eurozone want to save their currency then they – together with the institutions of the eurozone – must act now. The longer the delay, the greater the danger,” Cameron said.
China seeks clarity in eurozone
The head of the International Monetary Fund on Thrusday called for political clarity in efforts to tackle Italy’s debt crisis, following her warning on Wednesday that the world could face a “lost decade” if Europe’s problems were not tackled boldly.
Christine Lagarde urged Italy to act quickly to fill its political vacuum on a visit to China on Thursday.
“No one exactly understands who is going to come out as the leader. That confusion is particularly conducive to volatility,” she told a news conference in Beijing.
China – which holds an estimated 25 per cent of its $3.2 trillion of foreign exchange wealth in euro-denominated assets – is equally keen to see clarity and stability take hold in the eurozone, the country’s single biggest export market.
Wen Jiabao, the Chinese premier, told Lagarde that Europe’s sovereign debt crisis was a serious challenge to the world’s economic recovery, and had increased financial risks for developed economies, Chinese state media reported.
“China supports the measures taken by the European Union, European Central Bank and the IMF to deal with the crisis, and is willing to work with all parties to discuss effective co-operative measures to maintain global financial stability,” Xinhua news agency paraphrased Wen as saying.