Euro Crisis: Is the Break-up of the Euro Zone Next?
Italy’s borrowing costs rose to a record-high 7.25 percent on Wednesday. Prime Minister Silvio Berlusconi’s pledge that he will resign after austerity measures are passed by the Italian Parliament have not been enough to stem investors’ fears: The 7 percent level is the point at which Ireland, Portugal and Greece all had to seek bailouts. But Italy, which has Europe’s third largest economy and is the fourth largest borrower in the world, is seen as both too large to default and to bail out. US stock indexes fell as investors sought to rid themselves of Italian government bonds and reports are emerging from Brussels that Germany and France have started preliminary talks about a break-up of the euro zone.
Italy’s $2.6 trillion (1.9 trillion euros) of debt is greater than than of Greece, Spain, Portugal and Ireland altogether. Last week, Finnish Prime Minister Jyrki Katainen had said that “It’s hard to see that Europe would have the resources to take a country the size of Italy into the bailout program.” The European Financial Stability Facility (EFSF), the EU’s bailout fund, has 440 billion euros but only 270 billions will remain after commitments to Italy, Portugal and Greece are subtracted. Italy will then have to seek assistance from the International Monetary Fund; IMF fiscal monitors will soon be visiting Rome and European Union Economic and Monetary Affairs Commissioner Olli Rehn has said that he will have “very specific questions” regarding Italy’s economic pledges by this weekend.
The IMF itself has $391 billion but, as the European debt crisis drags on, Managing Director Christine Lagarde yesterday spoke of a potential “lost decade” for the world economy.
Italian President Giorgio Napolitano sought to boost confidence by saying that Berlusconi will step down soon. Political uncertainty — some say chaos — remains in Greece where negotiations to appoint a new Prime Minister to succeed George Papandreou have deadlocked. Papandreou delivered a resignation speech on state-run NET TV but has yet to formally resign. The leader of the political party LAOS George Karatzaferis abandoned the talks after Papandreou, opposition leader Antonis Samaras and Greek President Karolos Papoulias squabbled over who will be the new Prime Minister. Samaras has also reportedly balked at signing a written commitment about Greece meeting fiscal targets; EU leaders have demanded this letter before delivering the next tranche of 8 billion euros of aid to Greece.
German Chancellor Angela Merkel described the debt crisis as having become “unpleasant” and said that euro zone members needed to start talking about plans for closer integration. Senior EU leaders in Paris, Berlin and Brussels are reported to have spoken about one or more countries leaving the eurozone; those that remain in the “core” will be called to have deeper economic integration, especially on matters of tax and fiscal policy. Merkel also said that it is “ time for a breakthrough to a new Europe.”
But the call for a “two-speed Europe,” including euro zone members and others, is indeed a sign of how “the euro, which was meant to unite the Continent after the Soviet collapse and promote more federalism, is now pulling the European Union apart, both within the euro zone and between the euro zone and the others.”
Related Care2 Coverage
Photo by dimnikolov