http://www.guardian.co.uk/business/2011/no...urozone-breakupFears 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.
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