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The euro: is the end near?

The euro: is the end near?
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euronews : “For more insight euronews spoke to Daniel Gros, director of the Centre for European Policy Studies in Brussels. Mr Gros, Italy’s bond yields have reached a level that makes refinancing the country’s debt pactically impossible. What happens next? Will reform measures, as announced by Rome, be enough to reestablish credibility?”

Daniel Gros: “Yes and no is the answer. With regard to Italy, it doesn’t only matter whether or not the reform package that has been announced is implemented. But it matters greatly whether the country truly supports these measures. If the package is adopted by a small majority in parliament, but if the social partners (management and labour) are unwilling to make further concessions, then it would not be enough. If, on the other hand, there was a huge majority in parliament and if the unions said, ‘We want to make contributions’ as well, then it would be enough. And that could end the crisis quickly.”

euronews: “You once said that the fate of the euro would be decided in Italy. Well, we are at that point now. Can the euro survive, possibly without Italy and Greece?”

Gros: “The euro can certainly survive without Greece, but not without Italy. If Italy defaults, other countries like Spain or Portugal might also default. Even France might be in trouble then. A default of Italy is the end of the euro, maybe even the end of European integration. Italy holds the key to the euro’s survival, that’s pretty clear.”

euronews: “What can the leaders of the euro zone do? You have put forward some proposals, like the creation of a European Monetary Fund. Is this still feasible?”

Gros: “The European Monetary Fund, had it existed, would certainly have contained the problems of Greece, Portugal and Ireland. But we have passed this point now. It is not about a European Monetary Fund anymore. It is about the true European leadership. Who has the final say? Is it Berlin, the fiscal power of Germany? Or is it the European Central Bank? Right now, we are heading toward a situation in which only a strong intervention by the ECB can save the day, as even the German taxpayer is unable to bail out Italy. Maybe the ECB is the last resort.”

euronews: “Let me follow up on this. In the United States, the worst of the debt crisis has been avoided by determined action by the Federal Reserve, the country’s central bank. We in Europe do have the ECB. Shouldn’t the ECB be given more firepower to keep financial markets at bay?”

Gros: “The ECB has a problem which the Federal Reserve does not have: The ECB relies on national central banks and national governments. And these national governments have diverging interests. The German Bundesbank, for instance,

thinks that monetary stability is in danger and needs to be protected. Other central banks believe that the ECB needs to support countries with a liquidity crunch. In theory, the ECB has all the firepower it needs. The question is: Does the ECB want to use this firepower? Can the ECB use it? Can it use it to bail out one or two countries? This is the big conflict that is being waged behind the scenes in Frankfurt right now. And it is the outcome of this conflict that will finally determine whether Italy can keep the euro or not.”

euronews: “What outcome do you expect?”

Gros: “If Italy implements the austerity measures, then the ECB will use its firepower and the euro can be saved.”