Merkel: Toughest hour since WWII

GERMAN Chancellor Angela Merkel said yesterday that Europe could be living through its toughest hour since WWII as new leaders in Italy and Greece rushed to form governments and limit the damage from the eurozone debt crisis.

A rally on financial markets sparked by the appointment of respected European technocrats in Rome and Athens soon stalled. Analysts warned that daunting obstacles could hinder decisive action needed to breathe new life into their ailing economies.

Italy had to pay a euro-lifetime record yield of 6.3% to sell five-year bonds, with investors wary of buying its debt until prime minister-designate Mario Monti can undertake profound economic reforms.

In a first sign of trouble for new Greek prime minister Lucas Papademos, the leader of the main conservative party rejected any toughening of austerity and refused to sign a letter sought by European authorities pledging support for a new €130 billion bailout.

Merkel dramatised the situation facing the eurozone in an attempt to rally her conservative party behind the government at a congress in Leipzig.

“Europe is in one of its toughest, perhaps the toughest hour since WWII,” she told her Christian Democrats (CDU), saying she feared Europe would fail if the euro failed and vowing to do anything to stop this from happening.

In a one-hour address, Merkel called for closer European political union, but offered no new ideas for resolving the crisis that has forced bailouts of Greece, Ireland and Portugal, raising fears about the survival of the 17-state currency zone.

EU governments have until a summit on December 9 to come up with the outlines of a much bolder and more convincing strategy, with some form of huge, visible financial backing.

The ECB has been buying troubled eurozone governments’ bonds episodically to try to stabilise markets. But figures released yesterday showed it had halved its weekly bond buy at the height of the Italian government crisis last week, suggesting it was no longer willing to help Berlusconi.

While Italy’s problems and the extended departure of Berlusconi have pushed the collapse of the much smaller Greek economy backstage, IMF and European leaders will keep Papademos under pressure to implement radical reforms.

Papademos succeeded George Papandreou, whose proposal to hold a referendum on the bailout terms prompted EU leaders to raise the threat of a Greek exit from the currency bloc.

The new premier, who oversaw Greece’s entry to the eurozone in 2002, must win a confidence vote tomorrow before meeting eurozone finance ministers in Brussels on Thursday.

The Herculean task facing Papademos was illustrated yesterday when New Democracy leader Antonis Samaras said he would not vote for new austerity measures, adding the policy mix of spending cuts and tax rises agreed with lenders should be changed in favour of economic growth.

Yesterday’s eurozone industrial production figures pointed to a sharp contraction towards the end of the year and the risk of a double-dip recession.

The slide in factory output in the eurozone was the biggest fall since February 2009.