French Prime Minister Francois Fillon warned eurozone breakup would cost a ‘crippling amount’ and wreak havoc on bloc’s weakest members.
“The cost of a euro zone breakup would be exorbitant,” he said in a speech to parliament on Tuesday. “Some price it at 25 percent of GDP for the strongest economies and about 50 per cent for the weaker economies. The European continent would be ruined.”
The statement came amid reports that euro breakup would lead to Greek drachma depreciated 60 per cent while currencies of Portugal, Ireland, Italy Spain, Belgium down 20 to 35 per cent. Nomura’s fixed income research team said while PIIGS economies will bear the brunt of breakup, Germany’s hypothetical new currency would gain marginally.
Meanwhile, European Council President Herman Van Rompuy insisted eurozone sovereign debt crisis can be tackled not by treaty change but introducing tougher rules.
According to reports leaks to media ahead of crucial EU summit, Rompuy offered a fast-track ‘fiscal compact’ that do no need the ratifications of state parliaments or general public through referendums.
Both France and Germany, with US backing, are demanding a new EU treaty within the next three months which enshrines strict fiscal rules. Analysts are expecting a heated two-day summit where strong and weak eurozone nations will argue over the way forward.
While Sarkozy and Merkel appear to be supporting some of EU President’s proposals, they sharply differ on other proposals put forward by Rompuy.
Berlin and Paris are advocating the introduction of more tougher measures to be enforced upon EU members and are prepared to work towards a new treaty involving eurozone economies if they fail to gather support from all 27 EU states.
French Premier said both Sarkozy and Merkel are working on a Franco-German master plan to enhance fiscal governance in the eurozone which would be finalised by March and ratified by the end of 2012.
However, rating agencies are not warming up to the idea and are contemplating a reduction in credit ratings. Moody?s Investors Service hinted Tuesday that ‘rapid escalation’ of the sovereign debt crisis threatens all of the region?s sovereign ratings.
Moody?s insisted that credit risks are bound to rise if steps to stabilise markets in the short-term are not taken. The credit rating agency also expressed skepticism over policy makers’ ability to make quick decisions.
?Skepticism has grown that euro-area policy makers can deal effectively with the key challenges they face,? Pier Carlo Padoan, the chief economist at the Paris-based Organisation for Economic Cooperation and Development (OECD), said Tuesday while cutting forecasts for European and global growth. “Serious downside risks remain, linked to loss of confidence in sovereign-debt markets and the monetary union itself,? he added.
Standard & Poor’s earlier this week put all eurozone nations on credit watch with a ‘negative outlook’.
“The decision was prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole,” the agency said in a statement.
The euro fell on Wednesday, amid gloomy outlook, while European stocks plunged after a number of sources ranging from credit rating agencies to European government officials expressed skepticism about upcoming crunch EU summit where leaders will seek comprehensive solutions to resolve the eurozone’s debt crisis.