Debt crisis raises questions about eurozone′s future as recession looms | Europe| News and current affairs from around the continent | DW | 10.11.2011
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Europe

Debt crisis raises questions about eurozone's future as recession looms

The debt crisis that began on Europe's economic periphery in Greece has now spread to its core as rates soar on Italian bonds, forcing the currency union to face fundamental questions about its political future.

euro surrounded by stars of European Union

Talk of exiting the eurozone is no longer taboo

The European Union has projected that growth within the 17-member eurozone will effectively grind to a halt in 2012, due to the escalating sovereign debt crisis that has shaken governments in Greece and Italy and triggered calls in France and Germany for treaty changes that would allow Brussels to monitor national budgets.

The European Commission, the EU's executive body, released figures on Thursday which forecast annual growth slowing to 0.5 percent and unemployment hovering at around 9.5 percent, even worse than the bleak economic outlook in the US.

"This forecast is in fact the last wake-up call," warned Olli Rehn, EU Monetary Affairs Commissioner. "Growth has stalled in Europe and there is a risk of a new recession."

The grim forecast comes as the debt crisis has triggered political upheaval in Athens and Rome. Both Greek Prime Minister George Papandreou and Italian premier Silvio Berlusconi have agreed to resign their posts in favor of national unity governments, but protracted political wrangling over who will ultimately succeed the eurozone's latest political casualties has left markets in turmoil.

"The crisis as we see it today puts a huge pressure on investor sentiments and consumer sentiments and it basically freezes investment at the moment and has an impact on economic outlook for next year," Guntram B. Wolff, deputy director of the economic think tank Bruegel, told Deutsche Welle.

Periphery vs. core

France and Germany, meanwhile, have become more assertive within the eurozone as domestic political crises in debt-wracked member states threaten to throw the currency union into a fatal downward spiral.

Papandreou was forced to abandon his call last week for a national referendum on the terms of the latest bailout package after German Chancellor Angela Merkel and French President Nicolas Sarkozy made clear that the outcome of the vote would decide Greece's future in the currency union.

And in the lead up to the G20 Summit in Cannes last week, Italy - the eurozone's third largest economy - agreed to allow the International Monetary Fund (IMF) and European Commission to monitor its steps toward economic and fiscal reform after Berlusconi proved unable to present a reform package to his global partners.

Merkel has gone so far as to call for treaty changes to the European Union that would empower Brussels to sanction national governments which violate agreed upon rules on deficits and fiscal policy, referred to as the Stability and Growth Pact.

"If the mutual agreements of the Stability and Growth Pact are not observed, there has to be a power of intervention over the national budget by a European institution," Merkel said in an interview with German news agency dpa. "Otherwise it won't work as well as time goes by."

Sarkozy said Tuesday that the future model was a "two-speed" Europe in which a core of countries moves toward a "federal" governance structure while the periphery can proceed at a slower pace. The comments have led to speculation that Berlin and Paris may be contemplating a smaller eurozone without nations such as Greece if the crisis deepens, a prospect that eurozone expert Wolff views with concern.

"You will start to create a two-speed Europe in which the south of Europe…would be behind," he said. "That could ultimately lead to even the periphery breaking off from the core and that will have disastrous consequences for the eurozone as a whole."

Italian PM Berlusconi at G20 summit

The outcome in Italy could decide the future of the euro

'All options on the table'

Merkel has denied that plans for a smaller currency union are in the works, maintaining that Germany's "only goal is to stabilize the eurozone in its current form."

Wolff agrees that the "commitment by France and Germany to the euro is very strong," particularly to large economies such as Italy and Spain. But with the yields on Italian bonds soaring to over 7 percent for the first time since the introduction of the euro, there is a real risk that Rome will ultimately have to approach Brussels for a bailout - just like Greece, Ireland and Portugal. That's a nightmare scenario which could throw the existence of the entire eurozone into question.

Wolff says Italy is different from Greece because its bonds have a longer maturity, which means higher yields do not have the same immediate impact on its budget. He believes some form of federal union within the eurozone will be necessary to halt the crisis, but acknowledges that the current situation is fluid and unpredictable.

"We could also have a complete break-up," said Wolff. "All options are on the table at the moment."

Author: Spencer Kimball (Reuters, AFP, dpa, AP)
Editor: Martin Kuebler

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