Rehn gives backing to euro but calls for action on crisis

EU economic and monetary affairs commissioner Olli Rehn gave his backing to Italian prime minister Mario Monti's new government today but warned that swift action was needed to contain the escalating euro zone debt crisis.

He dismissed fears that the euro's survival was in question but said the crisis had reached the heart of the single currency.

"This contagion effect has been touching the proximity of the core and even touching the core itself," he told a news conference after meeting Mr Monti in Rome.

"It shows that this is an increasingly systemic phenomenon, which calls for strong financial firewalls in order to contain this contagion and have a counterforce to this market turbulence."

Euro zone member states are discussing dropping private sector involvement from the permanent bailout mechanism that is due to come into force in 2013, EU officials said today.

The discussions are taking place as part of wider negotiations over changing the EU treaty to introduce stricter fiscal rules, as sought by Germany.

Germany has insisted that private sector investors - banks and insurance companies - bear a portion of the losses in the bailout of Greece.

It comes on the day Italy was forced to pay record interest rate of 6.504 per cent in a €10 billion auction of treasury bills. This compares with 3.535 per cent in the last comparable sale in October.

The euro zone debt crisis has seen borrowing costs of almost all countries spiral upwards. An interest of 7 per cent is generally seen as being unsustainable and once Greek and Irish borrowing costs moved over this level the countries were forced to seek a bailout.

Germany failed to find buyers this week for almost half of a €6 billion bond offer which led to concerns that the crisis is starting to threaten its biggest economy.

Euro zone states originally agreed to include clauses in the permanent bailout fund, the European Stability Mechanism (ESM), that would enforce private sector involvement. But the majority of the euro zone's 17 countries now want those clauses removed from the ESM and there is movement towards that happening, the sources said.

"France, Italy, Spain and all the peripherals" are in favour of removing the clauses, one EU official told Reuters. "Against it are Germany, Finland and the Netherlands."

Others said while German insistence on retaining the clauses was fading, they would only be removed as part of a broader negotiation over changes to the EU treaty.

Berlin wants full backing for changes to the treaty before it moves on other areas where member states want it to soften its stance, the officials said.

The crisis in the euro zone is approaching a tipping point with Germany under pressure either to pick up the bill for saving the union or let the euro collapse.

Chancellor Angela Merkel is running out of options to ease the turmoil after rejecting selling common euro-area bonds or using the European Central Bank as a lender of last resort.

Germany opposes a plan that would raise money for indebted nations through joint bonds because such a move would jeopardise its top AAA rating. It also wants to have a more integrated budget to police spending across the region.

The region is also being hampered by slowing growth.

Yesterday, Mr Rehn said the euro zone's economic recovery has ground to a halt as the sovereign-debt crisis spreads to the core of the common currency area.

"Growth has stagnated and at the moment Europe is at zero-growth," Mr Rehn said in Helsinki.

"The situation is very grave since the contagion effect that started from Greece and spread to other peripheral euro area countries is now lately touching near the core of the euro area, and in the past days on the core itself."

The European Commission on November 10th cut its euro-region growth estimate for next year to 0.5 per cent from 1.8 per cent.

The ECB, which has extended the use of unconventional tools such as offering banks unlimited cash for more than a year and buying bonds of debt-strapped governments, this month forecast a "mild recession" in the area.

Agencies