Debt crisis countries ‘could ditch the euro’

A TWO-DIVISION Europe in which debt-burdened southern nations are handed back their own national currencies is the most “likely outcome” of the current debt crisis, former Liberal Democrat leader Paddy Ashdown declares today.

One of Britain’s strongest advocates of closer European ties, and of British membership of the single currency, Lord Ashdown says he now sees no future for the euro in its current form.

Instead, he says that a new “core” euro area, made up of Germany, France and other northern European nations could be retained, with the more indebted southern nations allowed to devalue their own currencies in the bid to return to health.

His intervention, made in today’s edition of the Spectator, comes after further dramatic shifts across the continent yesterday which saw fresh calls in Brussels for the formation of the long-promised “United States of Europe” as a way to solve the crisis and an insistence from France and Germany that Greece is an “integral” part of the eurozone.

In an emergency teleconference last night aimed at calming markets and tempering talk of an imminent default by Greece, German chancellor Angela Merkel and French president Nicolas Sarkozy moved to support the country’s position in the Eurozone.

Earlier, EU chief Jose Manuel Barroso said he supported plans to create new Eurobonds, adding: “What we need now is a new, unifying impulse, a new federalist moment – let’s not be afraid to use the word.”

However, the Eurobond plan was rebuffed by Germany’s finance ministry – triggering further doubts over whether the powerhouse economy of the continent is prepared to stand behind the debts of its neighbours.

The crisis has been triggered by fears that Greece is set to default on its debts and that it could be followed by other much bigger nations.

The fear is that such a panicky default would trigger a fresh collapse in confidence and a new global credit crunch.

Shadow chancellor Ed Balls warned that the crisis was now way beyond Greece and was focusing on whether Germany would also stand behind Italy, the continent’s second most indebted country.

Analysts also said that Italy would provide the crucial test, as its huge economy is too big to be supported with a round of ad hoc bail-outs, as have been given to Greece, Portugal and Ireland.

Failure to clarify a way forward was “incredibly dangerous”, said Mr Balls. “I think unless the German government in particular stands behind the European Central Bank now, being clear that they will back Italy and stand behind Italian debt, we could be in for a massive economic catastrophe.”

Nonetheless, markets rose last night after Italy agreed a new €56 billion austerity package, bolstering hopes that China may keep the Eurozone on life support by buying up bonds.

Chinese Premier Wen Jiabo had earlier urged European nations to “get their house in order”, saying the key issue now was to prevent the Euro debt crisis from turning into a global crunch.

But the growing pessimism is summed up in Lord Ashdown’s interview in which he is asked whether the Euro can survive in its current form. “No I don’t,” he said.

He added: “The most likely outcome is probably a core euro. A euro that has Germany, Austria, Finland and the Benelux countries in it – you’d have to have France in there for political reasons even though economically they wouldn’t come up to the mark precisely – and maybe Sweden. Then you have a core euro and you then create the institutions to govern the euro.”

Such a solution remains out of bounds for EU leaders, however, who lined up yesterday to warn that the break up of the Eurozone could also lead to the end of the EU itself. Instead, they called for immediate steps to greater integration.

In a speech to the European Parliament, Mr Barroso said: “I want to confirm that the commission will soon present options for the introduction of Eurobonds.

“This is a fight for the economic and political future of Europe … this is a fight for integration itself.”

A sign of the depth of the crisis came as it emerged that the so-called BRICS nations – Brazil, Russia, India, China and South Africa – would meet next week to discuss buying up Eurozone bonds as a way of dampening market fears.

Eurosceptic MEPs said that the only immediate solution was to kick Greece out of the Eurozone.

UKIP leader Nigel Farage told Mr Barroso: “Unless Greece is allowed to get out of this economic and political prison, you may well spark a revolution in that country.”