Concerns over Europe's ability to manage its sovereign debt crisis intensified this week, as political turmoil in Rome and Athens, and the stark possibility of a double dip recession, provoked panic on world markets.
The announcement that Silvio Berlusconi would step down as Italy’s prime minister once austerity measures were pushed through parliament, did not prevent a collapse of investor confidence. Rather, Italian 10-year bond yields passed the 7 per cent mark on Wednesday; a level that previously drove Portugal, Greece and Ireland to seek European bailouts. The European Central Bank (ECB) was forced to intervene and bought limited quantities of the country’s debt, which enabled bonds to rebound from previous lows.
Political chaos also characterised Athens this week, as talks to appoint a prime minister to succeed George Papandreou temporarily stalled. Greek party leaders ultimately agreed to name Lucas Papademos, a former ECB vice-president, as prime minister of a new interim government until early elections determine a permanent replacement in the first quarter of next year.
In response to Europe’s sovereign debt crisis and the domestic political tensions of particular member states, Angela Merkel, the German chancellor, issued a call for closer political integration within the eurozone. This assertion was echoed by José Manuel Barroso, the president of the European Commission, who called for the EU to "unite or face irrelevance".
In the midst of this political and financial turmoil, reports emerging from Brussels on Wednesday said that France and Germany had begun preliminary talks on the possibility of one or more member states leaving the eurozone. The remaining countries would push toward deeper economic integration, including on tax and fiscal policy. Further integration may prove difficult for some countries to swallow, necessitating EU Treaty changes, and by extension, referendums in at least four member states.
The renewed economic anxiety in the eurozone is provoking speculation on the possibility of a return to recession in Europe, with the European Commission cutting its euro-region growth forecast for next year to 0.5 per cent from its previous estimate of 1.8 per cent. “The forecast is in fact the last wake-up call,” Olli Rehn, the EU economic and monetary affairs commissioner, told reporters in Brussels on Thursday. “The recovery has now come to a standstill and there’s the risk of a new recession unless determined action is taken.”
By Sonia Jordan
