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10 December 2023

Italy, France meet as eurozone under pressure again

French President Nicolas Sarkozy (R) and recently elected Italian Prime Minister Mario Monti shake hands after a meeting at the Elysee Palace on January 6, 2012 in Paris, France. The leaders are due for a series of meetings over the coming weeks to discuss their concerns of the Eurozone crisis and their nations respective positions ahead of the first EU Leaders' Summit of 2012 in Brussels at the end of January. (GETTY)


The eurozone's debt-wracked economies came under renewed pressure on Friday as bad economic data undermined leaders' attempts to reassure markets that an end to the crisis is in sight.

Italy's Prime Minister Mario Monti met France's President Nicolas Sarkozy in Paris as the single currency bloc's second and third biggest economies sought to head off doubts about their deficit reduction plans.

The pair announced a mini-summit with Germany's Chancellor Angela Merkel on January 23 but also revealed a split in Europe's position, with France warning that it may go it alone on a financial transaction tax.

European governments and markets were also confronted with a raft of gloomy economic figures from Brussels -- unemployment stuck at a record high, retail sales down and consumer and business confidence sinking.

The eurozone's economy contracted in the last quarter of 2011 and will likely shrink again in the first quarter of the year, putting it in recession, analysts said.

New US figures showed unemployment there falling to 8.5 percent but in Europe the picture was bleak. Eurozone unemployment remained at a record 10.3 percent for the second month running in November.

The combination sent the euro plunging briefly under ê1.27 for first time since September 2010.

"Today's batch of eurozone data has recession written all over it," said ING analyst Martin van Vliet.

Nervous European banks parked 455 billion euros (ê582 billion) in the safe haven of the European Central Bank overnight -- a new record -- preferring to earn low interest rather than take the risk of lending to each other.

After a brief respite from bad headlines over the New Year holiday period, the eurozone debt crisis has resurfaced with a vengeance, driving down the single currency and threatening Italy and Spain.

France has yet to face the same soaring interest rates as its southern neighbours but its Triple-A debt rating is under threat of a downgrade, and bond markets are quickly losing faith in EU financial reform plans.

"It's not France being targeted, it's 15 of the 17 members of the eurozone," ratings agency Standard and Poor's chief European economist Jean-Michel Six told the daily Le Parisien when asked about France's Triple-A.

"The problem more than anything is the way the eurozone functions, which leaves a lot to be desired," he said.

Monti rattled markets with an unannounced visit to Brussels on Thursday before moving on to Paris and he is due to see Germany's Chancellor Angela Merkel in Berlin next week to prepare for a January 30 EU summit.

Sarkozy will also see Merkel on Monday amid a disagreement between Paris and Berlin over a planned tax on financial transactions. France has threatened to go it alone if Europe does not agree a tax by the end of the year.

Both Monti and a German government spokesman urged France not to move ahead of its partners on the issue but Sarkozy was adamant.

"We won't wait for others to agree to put it in place, we'll do it because we believe in it," Sarkozy said, saying it is wrong that "financial transactions be the only transactions that are exempt from all taxation."

The Paris talks came as International Monetary Fund head Christine Lagarde warned that the IMF could cut its 4.0 percent global growth forecast as recession threatens the developed world economies battered by the debt crisis.

Lagarde also said that she did not expect the euro to simply "vanish" in 2012 although the fact that she was publicly entertaining such a possibility did not encourage markets already dubious about Brussels' plans.

"Will Greece quit the euro zone in 2012? The euro partners have affirmed, reaffirmed their determination. We can only support that," she said.

Greece has suffered the greatest damage so far of any eurozone economy, with its new technocratic government forced to seek a bail-out from Europe and the IMF and its creditors obliged to accept a "haircut" on their loans.

The IMF's top economist said that banks holding Greek debt could be forced to take even larger writedowns than planned because of Athens' weaker-than-expected finances.

Olivier Blanchard told US television channel CNBC that writedowns of some 200 billion euros ($255 billion, Dh826.447bn) worth of Greek sovereign debt held by private investors could be more than 50 percent, the level agreed late last year, to ensure Athens can balance its books.

Greek protesters rained boos and shouted abuse at their leaders Friday during ceremonies around the country which to celebrate the Epiphany.

In more bad news, the European Commission has rejected Belgium's 2012 budget as overly optimistic and is demanding it shave off an extra 1.2 to 2.0 billion euros.

The ratings agency Fitch on Friday downgraded non-euro member Hungary to junk BB+ status and warned its unorthodox policy measures made reaching an aid deal with the IMF more uncertain.

Hungary is a relatively small economy but its woes could undermine richer neighbours like Austria, threatening its Triple-A rating.