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Nov. 14 - German Chancellor Angela Merkel offered a grave assessment of Europe's economic health and underscored her determination to keep the Euro from failing. Deborah Gembara reports.
REUTERS - German Chancellor Angela Merkel said on Monday that Europe could be living through its toughest hour since World War Two as new leaders in Italy and Greece rushed to form governments and limit the damage from the euro zone debt crisis.
A rally on financial markets sparked by the appointment of respected European technocrats in Rome and Athens soon stalled. Analysts warned that daunting obstacles could hinder decisive action needed to breathe new life into their ailing economies.
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Germany Chancellor Angela Merkel. |
Italy had to pay a euro-lifetime record yield of 6.3 percent to sell five-year bonds with investors wary of buying its debt until prime minister-designate Mario Monti can undertake profound economic reforms.
In a first sign of trouble for new Greek Prime Minister Lucas Papademos, the leader of the main conservative party rejected any toughening of austerity and refused to sign a letter sought by European authorities pledging support for a new 130 billion euro bailout.
Merkel dramatised the situation facing the euro zone in an attempt to rally her conservative party behind the government at a congress in Leipzig.
“Europe is in one of its toughest, perhaps the toughest hour since World War Two,” she told her Christian Democrats (CDU), saying she feared Europe would fail if the euro failed and vowing to do anything to stop this from happening.
In a one-hour address, Merkel called for closer European political union but offered no new ideas for resolving the crisis that has forced bailouts of Greece, Ireland and Portugal, raising fears about the survival of the 17-state currency zone.
European Union governments have until a summit on Dec. 9 to come up with the outlines of a much bolder and more convincing strategy, with some form of massive, visible financial backing.
Prospects are uncertain as the German government, the Bundesbank and hardliners in the European Central Bank have blocked key policy options. These include issuing common euro zone bonds, mutualising the euro zone’s debt stock, letting the ECB create money to fight the crisis, or act as a lender of last resort, directly or via the euro zone rescue fund.
High drama in Rome
In weekend drama, Italy’s president asked Monti, a former European commissioner, to form a government to reverse a disastrous collapse of market confidence in an economy whose debt burden is too big for the euro bloc to bail out.
Italians sang, danced and drank champagne in the streets to celebrate the resignation of scandal-plagued billionaire Silvio Berlusconi, and an impromptu orchestra near the presidential palace played the Hallelujah chorus from Handel’s Messiah.
The ECB has been buying troubled euro zone governments’ bonds episodically to try to stabilise markets. But figures released on Monday showed it halved its weekly bond buy at the height of the Italian government crisis last week, suggesting it was no longer willing to help Berlusconi.
After a tumultuous week, when Italy’s borrowing costs rose to the kind of levels that saw Ireland and Greece forced to seek international bailouts, initial market reaction was positive on Monday, with both stocks and bond markets lifted.
But in a sign of the fragile state of confidence, the trend was reversed after the Italian bond auction, and the release of figures showing industrial production slumped by 2 percent in the euro zone in September, raising the spectre of recession.
“(Monti) is perceived to be a positive change for the country,” said Annalisa Piazza, rate strategist at Newedge.
“Cautiousness on the future developments in Italy is fully justified. Credibility has been lost and it will take a while for market participants to believe that the country is back on the right track.”
Monti held talks with political parties on Monday before separate meetings with trade unions and employers on Tuesday, as he moves to appoint what is expected to be a relatively small cabinet made up of experts from outside parliament.
He went to work after a frenetic weekend in which Italy’s parliament approved a package of economic reforms agreed with European leaders, clearing the way for Berlusconi to resign.
“Monti spoke about a significant programme with many sacrifices,” Francesco Nucara, a lawmaker from one of the myriad tiny parliamentary groups involved in the talks, said after meeting the prime minister designate.
“It doesn’t end here”
But some were sceptical about the strategy to reverse the collapse of market confidence in Italy.
“It doesn’t end here” read a headline in Libero, a fiercely pro-Berlusconi daily which said that “the Left and its newspapers may have uncorked the champagne too early”.
While Italy’s problems and the long-drawn-out departure of Berlusconi have pushed the collapse of the much smaller Greek economy backstage, IMF and European leaders will keep Papademos under pressure to implement radical reforms.
Papademos succeeded George Papandreou, whose proposal to hold a referendum on the bailout terms prompted EU leaders to raise the threat of a Greek exit from the currency bloc.
The new premier, who oversaw Greece’s entry to the euro zone in 2002, must win a confidence vote on Wednesday before meeting euro zone finance ministers in Brussels on Thursday.
