Eurozone Running Out of Time, Expert Says

As the battle to handle the European debt crisis rages on, several reports indicating an almost doomsday mood in the eurozone surfaced on Sunday and Monday.
Eurozone Running Out of Time, Expert Says
11/29/2011
Updated:
11/29/2011

As the battle to handle the European debt crisis rages on, several reports indicating an almost doomsday mood in the eurozone surfaced on Sunday and Monday.

Italian media claimed that talks are ongoing about an International Monetary Fund (IMF) bailout of Italy and German media reported on alleged plans about the six strongest eurozone countries forming an elite within the zone. Britain meanwhile openly announced that it is drawing up emergency plans for a disorderly collapse of the euro. According to a particularly blunt commentary in the Financial Times, the eurozone “really has only days to avoid collapse.”

Influential Italian newspaper La Stampa reported Sunday that the IMF is preparing a 600 billion euro ($797 billion) assistance package to Italy, quoting unnamed Washington officials. An IMF spokesperson has since denied the reports.

Italy is currently taking measures to get more people, especially wealthy and patriotic Italians, to buy their government bonds. Among those who have responded are a group of the wealthiest Italian soccer players.

Italy on Tuesday is set to auction three and ten-year government bonds, at a record-breaking interest rate of more than 7 percent, according to a Reuters report Monday evening as investors are demanding ever more interest to take on the risk of owning Italian debt.

Germany has also had problems selling their government bonds, but they have nevertheless resisted the idea of a eurozone bond, which is deemed absolutely necessary by many observers for the survival of the common currency. Instead, they are said to be seeking to create an elite bond for the strongest eurozone countries.

German newspaper Die Welt reported Monday that Germany and France are holding secret talks about creating a bond to be issued by Germany, France, Finland, Netherlands, Luxembourg, and Austria, the triple-A assessed eurozone countries. This may be the first step toward an elite club within the zone, according to Die Welt, but German Finance Minister Wolfgang Schauble denied such plans, saying that Germany “wants to solve these things within the treaties,” the Irish Times reported.

The U.K., the biggest EU economy which did not join the common currency, has meanwhile stepped up its contingency planning in case of a disorderly collapse of the eurozone, said British Chancellor of the Exchequer (minister of finance) George Osborne in an interview BBC TV on Monday.

“We have obviously stepped up that contingency planning in recent months. You would expect us to do that as the British government. But that doesn’t mean we are predicting any particular outcome. We’re just ready for whatever the world, whatever the eurozone throws at us,” said Osborne.

Britain stands to be hit very hard by such a collapse, since it is a major shareholder in the IMF and a major exporter to the eurozone. In addition, its major banks hold billions in Eurozone-area debt.

As the bad news came out of Europe, U.S. President Barack Obama hosted the EU’s top leaders—European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso, and chief of EU foreign affairs Catherine Ashton—at a summit in Washington.

President Obama said the United States is ready to help them resolve the problems, since Europe’s economic fate has huge implications on the American economy. But he also noted that American taxpayers will not take responsibility to help Europe out of its debt crisis.

“If Europe is contracting or if Europe is having difficulties, then it’s much more difficult for us to create good jobs here at home because we send so many of our products and services to Europe,” said Obama in a joint press conference after the summit.

Barroso also stressed the close economic ties across the Atlantic and emphasized that while Europe is working hard to solve the problem, it can take time.

“We are absolutely serious about the magnitude of the challenge, we understand the challenge, but you have to understand that sometimes some decisions take time,” said Barroso at the press conference.

U.S. stocks soared on Monday afternoon as investors bet that recent developments would force Eurozone leaders to enact more forceful measures to stem the escalating crisis, including utilizing the European Central Bank (ECB)’s balance sheet to purchase European bonds. Asian shares also rallied early Tuesday local time on optimism from investors that European politicians may finally resort to united action.