Rehn warns of threat still facing the euro

Sat, Jun 2, 2012, 01:00

THE TURMOIL in the euro zone prompted yet another dire warning as EU economics commissioner Olli Rehn declared for a second time in two days that the single currency could fall apart.

Ireland’s vote for the fiscal treaty provided only a small measure of relief yesterday as the result was outweighed by the uncertain outlook for Spain and Greece and new data showing euro zone unemployment to be at a record level.

With 17.4 million euro zone adults without work, figures released yesterday showed that the unemployment rate in the single currency area was 11 per cent in April.

The highest unemployment was in Spain, where the official rate was 24.3 per cent and where half the country’s young people have no job.

International Monetary Fund chief Christine Lagarde denied a Wall Street Journal report that the fund was preparing an intervention in Spain.

“There is no such plan,” Ms Lagarde said after meeting Spanish deputy premier Soraya Sáenz de Santamaría.

“We have not received any request to that effect and we are not doing any work in relation to any financial support.”

Mr Rehn said the European powers faced “extremely tough” decisions and added that it was important to face the truth.

“The way things are going and under the current structures, the euro area has a significant risk of breaking up,” he said in a speech delivered in Helsinki. “We’re either headed for a deterioration of the euro area or a gradual strengthening of the European Union.”

Mr Rehn’s remarks came a day after he raised the prospect of the euro zone disintegrating if steps were not taken to foster a stability culture, curtail financial contagion and reduce borrowing costs for member states.

This week, the commission proposed the creation of a euro zone “banking union” to tackle bank market contagion, with measures including a pan-European guarantee on deposits and tighter regulation. Also in the frame is the possibility of empowering European Stability Mechanism bailout to rescue banks directly, with the money not including in the national debt of the country concerned.

These initiatives have received tacit support from European Central Bank chief Mario Draghi.

As Greece prepares for another general election in a fortnight, senior European figures and some other member states have acknowledged ongoing contingency planning for the possibility of the country returning to the drachma.

The fate of Spain’s banks, which are suffering from an unknown level of property losses, adds a further air of unpredictability to the drama.

Mr Rehn reiterated the commission’s offer of a one-year extension to its deficit-cutting target if the central government asserts control over the wayward finances of the country’s autonomous regions.

At the same time, Spanish budget minister Cristobal Montoro said the regions managed with the help of transfers from Madrid to balance their books in the first three months of the year. The government is preparing a new plan to ease the regions’ funding problems. This is likely to offer lending guarantees to individual regions which will be conditional on their execution of spending cuts.

Mr Montoro also said the euro zone was advancing towards more integration of the banking sector.

He reiterated his government’s support for direct ESM aid to banks. “The mechanism of direct aid to banks is part of the European banking union,” he said.

The country’s economy minister, Luis de Guindos, said on Thursday that the battle for the euro was being fought in Spain and in Italy.

“I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation,” he said.