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French, Italian leaders meet as crisis rolls on

French, Italian leaders meet as crisis rolls on

Grim economic news from across Europe greeted the leaders of France and Italy as they prepared to discuss in Paris on Friday the spiraling debt crisis that threatens to engulf both of their economies.
The crisis, which began as a problem of over-indebtedness in small, weaker countries, is now knocking at the door of core economies like Italy and France. It is pushing much of the region toward a new recession and is sending the euro _ which has been resilient over the past two years of the debt crisis _ to 16-month lows.
The interest rate, or yield, on Italy's 10-year bond rose above 7 percent again Friday, a level that has eventually forced other countries to seek bailouts. The problem is Europe cannot afford to rescue Italy as it has smaller economies.
Economic indicators also show that even the richer countries, like Germany, are no longer immune to the debt market jitters. Economic sentiment and retail sales are falling across the region, according to new data released Friday, while unemployment in the 17-nation eurozone is stuck at 10.3 percent.
European governments are trying to regain investors' confidence in their public finances, but doing so will be all the more difficult as their economies slow down or contract.
In Italy's case, French President Nicolas Sarkozy and other European leaders last year pressured Rome to adopt stringent austerity measures after its yield first rose above 7 percent. That forced out Prime Minister Silvio Berlusconi and brought in a technocratic government under economist Mario Monti that initially calmed investors.
But pressure is rising again, adding urgency to Monti's drive to pass the promised austerity measures.
Monti told a conference in Paris on Friday that Italy would meet its target of balancing its budget by next year and said that, if successfully managed, the crisis would eventually bring the 17 countries that use the euro closer together. But, he added, that they need help.
"To save the union, new powers must be given to the European Central Bank," he said. Many have argued that austerity measures like the ones Italy has under taken will work _ but need time to bear fruit. In the meantime, they need a respite from incessant market pressure that only the central bank can provide by gobbling up bonds and thus driving down borrowing costs. The ECB has intervened cautiously in bond markets, but some within the bank are concerned that even those limited moves overstep its mandate.
Those pushing for greater ECB intervention argue that, without it, yields will continue to rise and could eventually force Italy to seek help as other economies have.
While stocks and bonds appeared shaky, the euro continued to fall, trading as low as $1.2706 on Friday, its weakest since early September, 2010.
France, whose bond yields have also been rising steadily, though less dramatically than Italy's, faces the loss of its prized AAA credit rating. Any downgrade would have far-reaching consequences for Europe since Paris' credit rating is one of the bedrocks of the continent's bailout system.
In comments that could indicate what Sarkozy and Monti will discuss, French Finance Minister Francois Baroin told a conference in Paris on Friday that the first responsibility of Europe's leaders is to make good on promises to bring public debt and spending under control.
"We have to eliminate in the mind of the markets the existence of doubt on the question of unity in the eurozone," Baroin said. "There cannot be any doubt."
In a scramble to stem the crisis' march, European leaders pledged at a recent summit to hand sweeping powers over to Brussels, giving bureaucrats the power to send back irresponsible national budgets for revision. The routine violation in the past of European rules on overspending is partially responsible for over-indebtedness.
But Poland's finance minister warned Friday that such plans for closer ties among the countries that use the euro need democratic legitimacy before they can be put into place.
Finance Minister Jacek Rostowski told a conference in Paris that tighter eurozone integration is necessary, but that before vast powers are handed over to the EU executive, European citizens must have a say.
"For something that far reaching as far as national sovereignty to be accepted then there would have to be some form of deep democratic legitimization," he said. "That would either require a co decision with European Parliament or a majority of national parliaments or something like that."
In the interest of calming financial markets _ which can't wait for the kind of messy parliamentary votes and national referendums that have dogged the EU in the past _ leaders pledged to sign up to tighter integration at the summit. But many question whether such sweeping powers can be handed over without some kind of consultation with European citizens.
Rostowski also bemoaned that Britain didn't sign up to the new treaty proposed at the summit. All other EU countries did, though some have since expressed reservations.
"It would be catastrophic for the whole of Europe if the further integration of the eurozone, which we fully support, were to lead to division," he said.
Although the crisis has focused largely on the eurozone countries, financial turmoil was also growing on its fringes, in Hungary.
Market confidence in the country is fading quickly, as evident in a bond auction in which investors this week demanded 10 percent to lend it 12-month money. On Friday, Fitch Ratings downgraded Hungary's credit grade to junk status, as Moody's and S&P had already done.
The country has said it is open to negotiating a standby loan from the EU and IMF, but doubts remain about some of the government's policies. The uncertainty has sent the Hungarian currency, the forint, to all-time lows this week.


Updated : 2021-06-16 09:46 GMT+08:00