GERMANY AND France are stepping up their campaign for a radical overhaul of the euro zone rulebook, an initiative which comes amid growing talk that the weakest countries might leave the single currency.
The renewed drive to deepen economic integration within the euro zone follows a drastic escalation in the debt crisis as the borrowing costs of Italy reached unsustainable levels.
French president Nicolas Sarkozy has called for a “two-speed” Europe, saying euro zone countries will accelerate their integration while non-euro countries make up a looser group.
As German chancellor Angela Merkel intensifies her push for changes to the EU treaties, she said yesterday that “binding” EU oversight of national budgets was essential to stabilise the single currency.
Italian prime minister Silvio Berlusconi remained at the centre of attention yesterday, as the markets reacted negatively to the confusion generated on Tuesday by the announcement of his forthcoming resignation. Euro zone officials believe Italian leaders have but days to provide clarity over the adoption of the austerity plan which led Mr Berlusconi’s coalition to crumble.
Mr Berlusconi has anointed as his likely successor a 41-year-old Sicilian lawyer, Angelino Alfano, best known for trying, as justice minister, to guarantee the Italian prime minister immunity from prosecution in the courts.
As investors fretted over the effects on the euro zone of a prolonged period of political uncertainty in Italy, the interest rate on Italian five-year government bonds shot above 7 per cent. When 10-year bonds have gone beyond this level, other countries have sought a bailout.
In another interview, given late last night, Mr Berlusconi said: “I shall not be standing again. Indeed, I feel liberated. Now is Alfano’s moment.”
Reuters reported last night that officials in Berlin, Paris and Brussels have discussed measures in which core euro zone countries would quickly move ahead together.
Quoting EU sources, the news agency said these discussions raised the possibility of one or more countries leaving the euro zone. The report was greeted with scepticism in Berlin and Brussels.
A German government source said senior officials had no knowledge of such discussions and European sources said the creation of a core euro zone with stragglers leaving was not on the table.
However, Dr Merkel and Mr Sarkozy are widely held to have broken a taboo last week when they said a now-cancelled referendum in Greece should centre on whether the country stays in the euro or leaves it.
The clamour for deeper integration within the single currency area has alarmed non-euro countries, which fear they will be left behind.
In a speech last night in Berlin, European Commission chief José Manuel Barroso rejected the concept of a two-speed system as absurd.
“Let me be clear – a split union will not work. That is true for a union with different parts engaged in different objectives; a union with an integrated core but a disengaged periphery; a union dominated by an unhealthy balance of power or indeed any kind of directorium,” he said.
The advancing push to toughen EU governance rules comes amid mounting concern about the force and pace of the pressure on Italy, whose 10-year bond yield rose above the key 7 per cent threshold yesterday for the first time since the creation of the single currency.
“Mr Rehn was worried yesterday and he continues to be worried today,” said the spokesman for EU economics commissioner Olli Rehn.
As the turmoil continued throughout the day, the European Central Bank was said to be aggressively buying Italian bonds in a frantic bid to keep the yields down.
Italy must refinance €300 billion of debt in the next year, leading to mounting anxiety in Europe that the present rates of interest would shut it out of markets.
Euro zone officials fear the current volatility has potential to become a “contagion event” but they still believe it will be possible to bring the turmoil under control.
There was no end to the political uncertainty in Athens, where Greek prime minister George Papandreou said he was stepping down but would not say who would succeed him.
Parliamentary speaker Filippos Petsalnikos was expected to be named as the country’s new prime minister but there was reportedly a backlash among Pasok MPs, already enraged at the torpedoing of another candidate, former central banker Lucas Papademos, on Tuesday night.