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Europe at 'crucial moment', ECB president cautions

Text by News Wires

Latest update : 2012-05-24

European Central Bank President Mario Draghi warned Thursday that Europe was at a “crucial moment” if it wanted to save the euro as fears over the eurozone debt crisis mounted upon news that businesses had hit a near three-year low.

AFP - Eurozone tensions rose Thursday after grim news on the economic outlook and as investors sought safety in Germany on growing doubts over Greece's future after an EU summit failed to produce a remedy.

A May survey of eurozone business confidence showed the worst monthly fall for nearly three years while the data for Germany was the worst for six months and an industrial survey in France, the worst for 37 months.

European Central Bank President Mario Draghi said the EU was at "a crucial moment in its history ... The process of European integration needs a courageous jump in political imagination to survive."

The debt crisis has demonstrated the EU's "weaknesses," Draghi said, adding that while growth was a priority, "there is no sustainable growth without ordered public accounts."

At Capital Economics in London, economist Jennifer McKeown said problems in the periphery were eating away at the eurozone core.

A widening "economic downturn will further reduce the currency union's chances of survival," she warned.

The euro slumped to a 22-month dollar low of $1.2516, levels last seen in July 2010, but stockmarkets staged a technical bounce after heavy losses on Wednesday despite a slew of bad news figures on the economy.

"Nothing in the data ... suggests that economic conditions in the UK and Europe are easing against a backdrop of policy paralysis across Europe," CMC Markets analyst Michael Hewson told AFP.

"Unless policymakers come up with radical new solutions with respect to the crisis they will soon be faced with the prospect of delivering closer fiscal integration or overseeing the breakup of the euro," he said after an inconclusive EU summit overnight Wednesday.

If Greeks vote in new elections on June 17 against the budget cuts and reforms tied to a second debt rescue, the EU, International Monetary Fund and ECB are expected to cut their financial lifeline.

That would in effect force Greece out of the eurozone and could cause incalculable risks for other weaker members, notably Spain.

Under all these clouds, investors put their money into safe-haven German 10-year bonds, pushing the rate of return down to a record low 1.358 percent.

EU President Herman Van Rompuy, according to a senior EU source, is now "less pessimistic than a fortnight ago," sensing the June 17 Greek vote will produce a clear outcome as people come to terms with the likely disastrous consequences of leaving the eurozone.

But Citi analysts took a different tack.

"We assume that Greece will leave EMU in early 2013," they said, adding that sizeable adverse contagion around the eurozone would lead to an ECB rate cut, more cheap long-term financing for troubled banks and a bailout of sorts for Spain.

They tipped EU leaders to combine eurobonds with jointly-funded enhanced bank deposit guarantees, to offer an incentive for investors to stay in countries seen at risk of exiting the euro as well as to help protect the banking system.

The use of eurobonds for joint borrowing intended to ease the cost of raising fresh funds for weaker member states was discussed at length at Wednesday's informal EU summit as part of a new focus on generating growth.

This push was headed by new French President Francois Hollande but German Chancellor Angela Merkel held firm to her line that structural reforms to improve competitiveness in countries with debt problems must come before eurobonds.

London-based ETX Capital trader Markus Huber said investors would remain wary of eurobonds unless they were introduced as part of a wider-ranging economic and political union.

The risk, he said, was that distressed countries such as Spain or Italy would "start spending again (with the new funds raised), leading to a crisis much worse then the one we are seeing now."

Various other ideas were discussed including new eurozone funding to support the banking system, EU project bonds for infrastructure investment, more resources for the European Investment Bank and improved trade treaties with the likes of the United States.

A complicating factor is that Hollande's Socialists are campaigning in elections for a new majority in the French parliament and Merkel, weakened by the debt crisis, faces polls next year.

At Berenberg bank, analyst Christian Schulz said that the next EU summit on June 28-29 was likely to result in a "very modest" growth initiative.

Date created : 2012-05-24