Markets still jittery as euro falls and officials warn of two tier recovery

News - Banking

Written by Ray Clancy

Tuesday, 30 November 2010 09:23

The eurozone could divide in two with some countries recovering faster and others joining Ireland and Greece in debt, it is claimed.

‘There is a certain dualism in Europe,’ said Olli Rehn, the European commissioner for economic and monetary affairs. He pointed out that countries like Germany have rebounded forcefully from the global financial crisis and economic recession with a strong growth of exports but others, like Ireland, have faced ‘significant difficulties’.

Although some economic differences have always existed between the eurozone’s northern and southern countries, some economists now believe that, exacerbated by the shocks of the financial crisis, these multiple differences threaten the future of the euro itself.

‘I don’t think it’s sustainable in the absence of a much greater degree of political and economic integration,’ said Simon Tilford, chief economist at the Centre for European Reform, a research institute based in London.

Financial markets have given a largely negative reaction to the €85 billion bailout package for Ireland and to the announcement of new rules for dealing with debt crises in the eurozone after 2013.

Voices are still being raised about the situation in Portugal and Spain. European Union officials had hoped the Irish rescue and greater clarity on future rescues would quell market fears of contagion spreading to other countries.

Rehn said he is upbeat about Ireland’s prospects of achieving projected growth of 1.9 percent in 2012. ‘The Irish are smart, stubborn and resilient people and they will overcome this,’ he said.

In a joint statement with Dominique Strauss-Kahn, managing director of the International Monetary Fund, he said that the economic programme announced by Ireland is ‘a forceful response to vulnerabilities in the banking system imposing a heavy cost on the budget and, in turn, hurting the prospects for growth that Ireland needs for an enduring solution to the crisis’.

The duo said it represents a ‘clear strategy for tackling today’s problems and for harnessing the enormous growth potential of this open and dynamic economy. Swift and sustained implementation of this programme will create a smaller banking sector that is robust and well capitalized, and able to serve the needs of Ireland’s economy’.

But fears that Ireland’s fiscal problems could spread to more eurozone countries won't go away and investor sentiment remains subdued. The financial markets are edgy. The euro slumped to $1.3065 on Monday, a low not seen since September 21, and yields on Italian and Spanish 10 year bonds jumped 20 basis points, the biggest daily rise in more than a decade. The single currency has fallen about 6% against the dollar this month alone and is on track for its biggest monthly fall since May, when it fell 7.5%.