Europe’s Economic Crisis Intensifies

By Lisa Bryant

Europe’s financial and political problems deepened, as stock markets tumbled, Italian bond yields rose over the political turmoil in Rome, and a new coalition government prepares to take over in Greece.

The eurozone crisis has risen another notch with Italy’s government heading for the door, stock markets plunging and Greece in crisis.

Outgoing Greek Prime Minister George Papandreou announced agreement with opposition lawmakers on a new coalition government that likely will have to carry out austerity measures demanded by the country’s international creditors.

And, after hanging on for weeks, veteran Italian Prime Minister Silvio Berlusconi now says he will resign and not run for office again. President Giorgio Napolitano must either work on forming a new government or call early elections.

Rome becomes the latest casualty of the financial crisis that already has brought down the governments of Portugal, Ireland and Greece. But as Europe’s third-largest economy, Italy’s skyrocketing debt and deficit are viewed as far more serious.

Analyst Ben May, with London-based Capital Economics, said it will take more than political change to put Italy on a healthier path.

“It is not just that the current government is not up to the job, but Italy has huge structural problems that are going to take years to resolve,” said May. “And that, given that backdrop, it may well be very difficult for Italy to get its debt on a stable footing either without huge amounts of assistance from abroad or some form of a deal.”

Eurozone countries are now scrambling to build a firewall to contain the spreading debt crisis. In an interview on France’s RFI radio, French Foreign Minister Alain Juppe said the goals were clear.

Juppe said it was out of the question for Europe to abandon either the 17-nation eurozone or the euro. His remarks appear targeted at speculation that Greece could leave the currency union.

The fast moving events have left analysts like Janis Emmanouilidis, of the Brussels-based European Policy Center, uncertain about where Europe is headed.

“What is obvious is that the crisis has again reached a new level, a new phase. At the same time we are seeing E.U. member states, especially Berlin and Paris, Germany and France, ready to act more boldly than they have this summer… At the same time, we do not know whether this crisis has reached a size in which it has become unstoppable or whether we are in a way in the final phase of it,” said Emmanouilidis.

Greece’s new coalition government must meet EU terms for a new installment of aid by December. After that, Greek officials say, they will be unable to pay their bills.