Euro-Debt Crisis 'Threatens Heart Of EU' Jose Manuel Barroso Warns
The debt crisis is threatening the core of the eurozone, the head of the European Commission has said, warning that severe economic problems could spread throughout the region.
In a letter to EU leaders on Thursday Jose Manuel Barroso said "it is clear that we are no longer managing a crisis just in the euro-area periphery".
He added that markets needed to "be convinced that we are taking the appropriate steps to resolve the crisis."
"Markets highlight, among other reasons, the global economic uncertainties due to both economic growth and the protracted decision on budgetary adjustments in the US but, first and foremost, the undisciplined communication and the complexity and incompleteness of the 21 July package," he said.
The statement comes after Barroso warned that the eurozone was at risk of system failure, and after Spanish and Italian bonds rose above 6 per cent - their highest levels since the launch of the single currency.
If Spain and Italy's borrowing costs continue to rise it is likely that they will be forced to request emergency loans.
Greece, Ireland and Portugal are already dependent upon EFSF emergency loans and it is feared that the ESFS is too small to be able to provide funding for both Italy and Spain, the eurozone's third and fourth biggest economies respectively. The economy of Italy alone is almost twice as large as Greece, Ireland and Portugal combined.
Italian Prime Minister Silvio Berlusconi sought to reassure Italians on Tuesday, saying the economy was "strong" and the nation's banks "solvent". Italy currently has a debt stock of 120 per cent of GDP, and accounts for 23 per cent of all eurozone sovereign debt. This means that Italy is regularly required to raise a large amount of money from the bond markets despite running one of the lowest budget deficits in the eurozone.
Italy's debt has not previously been a cause for concern due to its stability - the nominal cost of borrowing has typically been lower than the nominal growth rate of the economy. However, recently the cost of borrowing has gone up and the prospects for economic growth have gone down. These conditions combine to make managing Italy's debt much harder.
Charles Jenkins of the Economist Intelligence Unit told the Huffington Post UK it was "remarkable" Italy had not previously been considered as economically vulnerable as Spain.
"Italy is now the greater cause for worry. The Italian government is trying to put together a joint programme with unions and employers but it looks very doubtful whether whatever the present Berlusconi government does that it can regain the confidence of investors. Italy's political crisis is now a euro zone one.”
However, other economists are more optimistic. The BBC's Economics Editor, Stephanie Flanders, reports that Morgan Stanley and Goldman Sachs both believe that Italy could survive for up to two years with borrowing rates near to 7 per cent. This brighter outlook reflects the short term benefits Italy could gain from a predicted growth rate of 1.5 per cent a year over the next five years.