Italian prime minister Mario Monti has warned that the sovereign debt crisis in Europe is not only threatening the existence of the eurozone, but also the European Union itself.
Monti told German news magazine der Spiegel in an interview, published on Sunday, that Europe is facing a “psychological break-up”.
Strict conditions of budget cuts attached to bailout funds to struggling eurozone countries, such as Greece, have angered their citizens and Germany especially has been painted in a negative light.
Last week, European Central Bank chief Mario Draghi disappointed as he failed to deliver after promising to protect the euro at all costs. Politicians and investors had been expecting decisive measures, following Draghi’s pledge to do “whatever it takes to preserve the euro”.
But the bank left interest rates unchanged and postponed planned bond purchases of debt issued by the most troubled eurozone countries, such as Italy, until September.
Many economists believe the ECB’s decision is strongly influenced by Germany’s Bundesbank, which strongly opposes the buying of bonds. The German central bank also opposes any moves to give a banking license to the European permanent rescue fund, an idea which is supported by Monti.
Spain’s EUR100bn bailout package has lifted shares in Asia and resulted in a 1% gain for the euro against the US dollar and the Japanese yen.
Stock markets in Japan and Hong Kong were up by about 2% on Monday, with traders contributing the rise to the EUR100bn bailout for Spain’s banks, which was agreed on Saturday.
The bailout for Spain, which is targeted at its ailing banking sector suffering from bad loans to the country’s troubled property industry, carries fewer demands for austerity measures like those attached to the bailout of Greece.
Greece will hold a second elections on June 17, but last month the winners of the previous elections failed to form a government. Analysts agreed that the bailout for Spain will buy some time, but added that the crisis is far from over and the focus will shift again to Greece, which is expected to vote anti-austerity parties to power.
“All eyes are still on Greece’s upcoming elections but investors’ worries over the eurozone have eased in the short term,” Andy Du of Orient Futures Derivatives told the BBC.
International credit agencies have signaled the need to shore up Spain’s banks in the recent weeks and months, with Moody’s downgrading the ratings of 16 banks in May. The Spanish government also took control of banking major Bankia last month.
Depositors in Spain, like in Greece,have been pulling their funds from their bank accounts, but this weekend’s bailout is believed to have a calming affect and restore confidence.
Stock markets in Asia and Australia recovered slightly on Monday as G8 members, meeting over the weekend, said they would do everything in their power to avoid another full blown financial crisis
The Nikkei 225 index in Japan gained 0.4%, after dropping sharply on Friday as a result of worries of Greece and the effect a prolonged European debt crisis could have on the global economy. Australian shares rose by 0.7% after hitting a six month low last week.
“The fate of Greece won’t become clear until the election, and markets will be swung around by comments from European leaders in the meantime, all of which makes it extremely difficult for investors to take any positions,” said Hirokazu Yuihama, a senior strategist at Daiwa Securities in Tokyo, told Reuters.
“Today’s move is merely a rebound from sharp losses on Friday and it doesn’t have momentum to rise strongly. The G8 outcome lacked the punch to give much incentive for markets.”
US president Barack Obama said that he had faith in Europe’s ability to tackle the sovereign debt crises, but added that Europe must now focus on jobs and growth, echoing the words of newly elected French president Francois Hollande.
Following the comments made at the G8 summit, the EU issued a statement saying that the focus needs to remain equally on austerity and growth.