Eurozone split would cost Ireland 50% of wealth

IRELAND and the other eurozone countries could immediately lose half their wealth were the euro area to break apart, while Germany would lose a million jobs if the currency area were to shrink to a few core members.

The figures, from a German financial institution, were part of an argument put forward by Commission president Jose Manuel Barroso to a German audience amid reports France and Germany are planning a two-tier euro.

They must choose unity over fragmentation, otherwise Europe will be reduced to a collection of “perfectly sovereign corks bobbling along in the wake of other people’s ocean liners”, he said, quoting Britain’s Paddy Ashdown.

But there was little sign of anybody riding to the euro’s rescue as the cost of Italian bonds shot past the 7% mark that signalled the end for Portugal and Ireland and when they were forced to seek a bailout. France was also in the sights of investors as they tried to offload bonds, fearful that contagion would spread to the eurozone’s second largest economy.

However Italy, the euro’s third biggest member, is too big to save for the €440 billion European Financial Stability Facility and plans to leverage it to €1 trillion are at least a month away.

The only easy solution in sight is that the ECB step in and block out world markets by buying up all the bonds it needs to until the situation calms down. It has been buying Italian bonds in increasing amount in recent days but are not putting anything like the amount of money into their purchases as they did in August.

It defends its attitude by explaining that buying up bonds wholesale would work only temporarily, and they fear it would destroy their independence from the eurozone member states.

And one of their executive board members, Peter Praet, made it clear in an interview that it was not their job to bail out countries “when there are fundamental doubts about the sustainability”.

His view was supported by Jurgen Stark, the German representative on the ECB soon to retire, who said: “We are not the lender of last resort, and I do not advise European governments to ask the ECB to become lender of last resort”.

As a result the eurozone has little option but to pin its hopes on the markets reacting to its efforts to resolve the issues that make countries less credit-worthy — mainly borrowing to fund their day-to-day spending.

Economics Commissioner Olli Rehn indicated that the Commission has much more profound changes in mind for Italy than the government has committed to so far.

The changes outgoing prime minister Silvio Berlusconi committed to did not go far enough in key areas, such as opening up all areas to competition, moving tax from labour to consumption and reforming the pensions system.

He made it clear he needs more than just a commitment on paper, he wants detail of the changes, lists of concrete action and time lines for implementation. They have written to the Italian authorities.

“We expect replies very, very soon,” said Mr Rehn.

But the first imperative was to restore political stability in the hope of stabilising the cost of borrowing in a country where general government debt is just over 120% of GDP and the cost of borrowing has jumped to dangerously high levels over the past few days.

Mr Rehn pointed out that while the average length remaining for Italian bonds is just over seven years, every 1% increase in interest rates costs an extra 0.2% in 2012 and double that in 2013.

He also urged Paris to announce fresh austerity measures as soon as possible.