Angela Merkel warns of 'Europe's toughest hour since WW2'

Warning: German Chancellor Angela Merkel today said Europe could be living through its 'toughest hour since World War Two'

German Chancellor Angela Merkel today said Europe could be living through its 'toughest hour since World War Two' - as new leaders in Italy and Greece rushed to form governments and limit the damage from the eurozone debt crisis.               

Financial markets took heart that a key Italian bond auction drew decent demand from investors and hopes that new leaders in Greece and Italy would take decisive action to breathe new life into their sick economies.   

Merkel told her conservative party in Leipzig: 'Europe is in one of its toughest, perhaps the toughest hour since World War II.

She also said she feared Europe would fail if the euro failed, and vowed to do 'anything' to stop this from happening.   

But in a one-hour address to the Christian Democrats (CDU), she offered no new ideas for resolving the crisis that has forced bailouts of Greece, Ireland and Portugal, and has raised fears about the survival of the 17-state currency zone.   

She said: 'If the euro fails then Europe fails, and we want to prevent and we will prevent this, this is what we are working for, because it is such a huge historical project.'

Merkel's warning came as Italy's Prime Minister-elect started talks today to create a new government of non-political experts.

Mario Monti, dubbed Super Mario, set about creating his cabinet - which is tasked with overhauling an ailing economy to keep market fears over the country from threatening the existence of the euro.

In a vote of confidence in his ability to quickly form a new government, the Italian government's borrowing rates on the secondary bond market sank.

 

In with the new: Mario Monti (left) and Lucas Papademos (right) are the new Prime Ministers of Italy and Greece, and their appointments have led to the calming of markets

 

There was some respite for the euro this morning after the Italian Treasury paid a record 6.29 per cent yield to sell five-year government bonds in the first auction held since Monti was asked to head an emergency government.    

Financial markets have also been calmed this morning amid fresh hopes that Europe is making 'significant' progress in tackling its debt crisis.

The new Prime Ministers in Italy and Greece sees the FTSE 100 down 0.52 per cent at 5,516.53; Germany's DAX 1.12 per cent down at 5,988.92; and France's CAC 40 trading 1.53 per cent down at 3,101.17.

Asia's markets have also been boosted by the developments - the Hang Seng Index finished 1.94 per cent up at 19,508.18; China Enterprises Index ended the day 2.75 per cent up at 10,716.9; and the Shanghai Composite Index closed 1.92 per cent up at 2,528.71.

The markets have been tempered, slightly, by the news that France could be the next eurozone country to fall into economic chaos - and that former Italian Prime Minister Silvio Berlusconi is considering standing for office again.

The appointment of a new Prime Minister in Greece, which needed to form a new government to pass stringent economic reforms in order to receive the next instalment of its €110billion bailout loan, was seen positively by the markets.

Former European Central Bank vice president Lucas Papademos - who oversaw Greece's entry to the eurozone in 2002 - will meet with his new cabinet on Wednesday before meeting with eurozone finance ministers on Thursday to negotiate the payment of the next instalment of the country's bailout deal. He takes over from George Papandreou.

And the appointment of a successor to Silvio Berlusconi in Italy, which last week came perilously close to defaulting on paying interest on its 1.9 trillion euro debt, has also had a positive effect on markets, despite Berlusconi saying he would consider standing for office again once the crisis has passed.

The president of the eurozone's third largest economy, Giorgio Napolitano, yesterday asked former European Commissioner Mario Monti to form a government.

He faces fears that the country will need a Greek style bailout which Europe cannot afford as it is simply too big.

The cost of Rome’s borrowing shocked markets last week as the interest rate it was being asked to pay soared at one stage to almost 7.5 per cent on a ten-year bond. It now stands as 6.54 per cent.

Italy held a bond auction today seeking to raise up to three billion euros (£2.6 billion). It has been deemed a 'success' because of decent demand.

Mike Lenhoff, chief strategist at Brewin Dolphin, welcomed the change in leaders and said: 'We have now got two strong characters who are prepared to put public interest ahead of personal interest.

'They have a lot of goodwill to start with. The challenge for them now is to implement the fiscal austerity and budget reforms.

 

 

Out with the old: Silvio Berlusconi (left) and George Papandreou (right) have stepped down as the leaders of Italy and Greece

 

'The important thing for them is to attempt to re-establish credibility as quickly as possible. The first test of this will be the reception of the bond auction in Italy.'

This week also sees Spain – regarded as another weak link in the eurozone - looking to raise about four billion euros with an issue of ten-year bonds.

France is expected to raise as much as ten billion euros in long and short-term debts.

France, regarded alongside Germany as a core member of the eurozone, was also drawn into the debt maelstrom last week when the yield on its bonds rose sharply.

British chancellor George Osborne warned last night that France is being drawn into the same economic chaos as Italy.

He made it clear the crisis will not be over until France too has answered doubts about its debts and the rising costs of borrowing on the markets which effectively ended Berlusconi’s premiership in Italy.

 

Warning: British chancellor George Osborne (left) has warned French President Nicolas Sarkozy (right) that France could be drawn into the same economic chaos as Italy

 

 

PAPADEMOS FACES FIRST PROTEST

The new Greek Prime Minister, Lucas Papademos, has the support of three in four of his countrymen, according to opinion polls.

But he was facing his first protest in front of parliament this afternoon from left-wing demonstrators who accuse the new government of working in the interests of bankers.            

Inspectors from the "troika", the International Monetary Fund, European Central Bank and European Union, started arriving in Athens today, piling pressure on Greece to qualify for a second bailout worth 130 billion euros and an 8 billion euro tranche from the earlier bailout, needed to finance bond payments due at the end of the year.

Greece said on Monday it had raised 380 million euros from the sale of mobile telephone frequencies to its three main cell phone operators.

The sale forms part of the country's plan to sell 50 billion euros of state assets over the coming years to repay its debt.    

But in a sign of problems faced by the Athens government, German construction group Hochtief revealed it may have to take a financial hit on the value of its road contracts in Greece due to mass toll dodging by Greek motorists.

In a warning to French president Nicolas Sarkozy, Osborne said ‘the immediate crisis in hand’ was ‘dealing with the lack of confidence in Italy’ and ‘dealing with the questions that have been raised over countries like France’.

‘That is where all our efforts have been focused on at the moment,’ he said.

‘We’re not any more just talking about countries like Greece.

'We’re talking about big countries like Italy and France . . . having to take very, very difficult decisions.’

Contrasting the success of Britain in reassuring the markets that the Government is serious about tackling the UK’s huge debts, the Chancellor pointed out: ‘France has had two emergency budgets in the last three months.’

Arguing that Britain is better prepared for the storm, he told the BBC Politics Show he was not ‘a eurozone finance minister who is terrified he can’t sell his country’s debt tomorrow’.

Berlin plans to issue about six billion euros worth of bonds this week.

Alongside Britain it has one of Europe’s lowest costs of borrowing.

The total of 21.5 billion euros being raised is not an usually high sum, but it is far higher than the six billion euros raised by eurozone countries last week and comes at a critical moment for the nations in the single-currency bloc.

 

Goodbye: A protester in Rome holds up a sign to celebrate the end of Silvio Berlusconi's tumultuous time as prime Minister