Italy meets France as eurozone wobbles once more

6th January 2012, Comments 0 comments

Italy's Prime Minister Mario Monti meets France's President Nicolas Sarkozy of France on Friday as pressure mounts on two of the biggest but most fragile economies in the debt-wracked eurozone.

Nervous European banks parked 455 billion euros ($582 billion) in the safe haven of the European Central Bank overnight -- a new record -- preferring to earn low interest rather than take the risk lending to each other.

After a brief respite from bad headlines over the New Year holiday period, the eurozone debt crisis has resurfaced with a vengeance, driving down the single currency and threatening Italian and Spanish finances.

Effects of the crisis on the real economy deepened as well as official figures showed Friday that eurozone unemployment remained at an all-time record of 10.3 percent for the second month running in November.

France has yet to face the same soaring interest rates as its southern neighbours, but its Triple-A debt rating is under the imminent threat of a downgrade as bond markets lose faith in EU financial reform plans.

Monti rattled markets with an unannounced visit to Brussels on Thursday before moving on to Paris on Friday, and he is due to see Germany's Chancellor Angela Merkel in Berlin next week to prepare for a January 30 EU summit.

After the talks in Paris, Monti and Sarkozy were to make a joint statement that will be keenly awaited on the markets, anxious for a sign that the single currency bloc is uniting around a credible deficit-reduction plan.

"It's not France being targeted, it's 15 of the 17 members of the eurozone," ratings agency Standard and Poor's chief European economist Jean-Michel Six told the daily Le Parisien when asked about France's Triple-A.

"The problem more than anything is the way the eurozone functions, which leaves a lot to be desired," he said.

The Paris talks came as IMF director Christine Lagarde warned that the body is likely to reduce its 4.0 percent global growth forecast, as recession threatens the developed world economies battered by the debt crisis.

"It should be revised downwards. We will come out with figures around January 25, 26," she told a news conference in South Africa.

Lagarde also said that she did not expect the euro to simply "vanish" in 2012, although the fact that she was publicly entertaining such a possibility will not encourage markets already dubious about Brussels' plans.

"Will 2012 be the end of the euro? My answer is: 'I don't think so'," she said. "The currency itself is not likely to vanish or disappear in 2012."

"Will Greece quit the euro zone in 2012? The euro partners have affirmed, reaffirmed their determination. We can only support that," she said.

Greece has suffered the greatest damage so far of any eurozone economy, with its new technocratic emergency government forced to seek a bail-out from Europe and the IMF and its creditors obliged to accept a "haircut" on their loans.

But the interest rate that Italy -- the zone's third largest economy -- is obliged to pay on its bonds is now also close to unsustainable levels.

Sarkozy has embarked on an austerity drive designed to prevent France suffering from the same fate, but private French lenders are dangerously exposed to Italian and Spanish debt.

European stocks slid on Thursday after Madrid warned that its banks could be in worse shape than thought and Italy's top bank UniCredit said that if the eurozone crisis worsens the euro may be abandoned.

Madrid and Milan's markets plunged, dragging Asian markets down in their wake, but European exchanges re-opened cautiously up on Friday.

The euro itself has also taken a battering -- fetching $1.2787 in Tokyo afternoon trade after sinking in New York late Thursday to as low as $1.2771 -- its lowest point since September 2010.


© 2012 AFP

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