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Eurozone split fears subside

Political and economic crisis in Italy spurred fears of a split in the eurozone with borrowing costs for Europe’s third biggest economy at unsustainable levels and the bloc unable to afford a bailout.

world Updated: Nov 11, 2011 01:27 IST

Political and economic crisis in Italy spurred fears of a split in the eurozone with borrowing costs for Europe’s third biggest economy at unsustainable levels and the bloc unable to afford a bailout.

EU sources told Reuters that French and German officials had held discussions on a two-speed Europe with a smaller, more tightly integrated euro zone and a looser outer circle.

The discussions among senior policymakers, still in the realms of the theoretical, have focused on how to protect the euro zone from breaking up via tighter common policies which some members may by unable or unwilling to live with.

A German government spokesman said on Thursday that Berlin was not pursuing the idea of a smaller euro zone.

Asian shares fell more than 3% after similar falls on Wall Street and in Europe as investors took fright at the accelerating sovereign debt crisis and at buck-passing among European leaders and institutions.

The risk premium on all southern European government bonds over safe-haven German Bunds continued to rise at the opening on Thursday ahead of an Italian treasury bill sale seen as a major test of the country’s ability to fund itself.

As the crisis accelerated, European Commission President Jose Manuel Barroso issued a stark warning of the dangers of a split in the European Union.

“There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East,” Barroso said in a speech in Berlin.

The European Central Bank’s hardline chief economist told governments not to expect the bank to rescue them with unlimited funds, despite its efforts to stabilise runaway bond markets.

One euro zone official said the bloc was not making any plans to bail out Italy, which is deemed too big to save with the 440-billion-euro European Financial Stability Facility.