BRUSSELS: Euro zone tensions rose again yesterday with grim signals from business, and a flight of capital into Germany after an EU summit disagreed on solutions to the crisis.
Hanging over European Union governments, and business and finance, is the possibility of Greece leaving the euro zone.
An informal summit of European Union leaders overnight resulted in little apart from attempts to talk around deep differences between France and Germany on diluting economic reforms in debt-ridden members with growth stimulus.
The May survey of euro zone business confidence showed the worst monthly fall for nearly three years. The data for Germany was the worst for six months and an industrial index for France the worst for 37 months.
The flash Purchasing Managers Index (PMI) compiled by the London-based research firm Markit fell to 45.9 points in May, down from 46.7 in April in what amounted to the fastest rate of decline since June 2009.
At Capital Economics in London, senior European economist Jennifer McKeown commented: "Spreading economic downturn will further reduce the currency union's chances of survival."
The euro slumped to a 22-month dollar low point of $1.2516, last reached in July 2010. It later stood at $1.2544.
Stocks fluctuated and then rallied slightly. London's benchmark FTSE 100 stock index climbed 0.59 percent. Frankfurt's DAX 30 added 0.13 percent and the Paris CAC 40 won 0.38 percent.
"Nothing in the data released this morning suggests that economic conditions in the UK and Europe are easing against a backdrop of policy paralysis across Europe," CMC Markets analyst Michael Hewson told AFP.
"Unless policymakers come up with radical new solutions with respect to the crisis they will soon be faced with the prospect of delivering closer fiscal integration or overseeing the breakup of the euro."
If Greeks vote in new elections on June 17 against the budget cuts and reforms tied to a second debt rescue, the EU, International Monetary Fund and European Central Bank are expected to curtail drastically financial lifelines for Greece.
This would push Greece from the euro zone and could cause incalculable risks for other weaker members, notably Spain.
Under all these clouds, funds flowed into safe-haven German 10-year debt bonds, pushing the fixed rate of return down to a record low level of 1.358 percent. The French 10-year bond yield also fell to close to record levels, to 2.575 percent.
EU President Herman Van Rompuy told journalists after the summit: "We want Greece to remain in the euro area while respecting its commitments."
But one diplomat told AFP that officials from the other 16 euro zone countries had been told this week to "reflect" on what the departure of Greece would mean.
The main point of contention at the summit, the creation of eurobonds for joint borrowing by strong and weak countries together, was discussed under a new focus on generating growth.
This push was headed by new French President Francois Hollande, but German Chancellor Angela Merkel held firm to her line that structural reforms to improve competitiveness in countries with debt problems must come before eurobonds.
Various other issues and ideas were discussed: EU project bonds for infrastructure projects, more resources for the European Investment Bank, use of existing EU project funds and the use of new euro zone rescue funding to support banks, with help from the European Central Bank, and a bank deposit insurance scheme.
Britain insisted that it would fight resolutely against a proposed financial services tax, intended to fund future problems in the banking sector, which it sees as a largely France-inspired threat to the City of London.
Hollande, a Socialist who displaced Nicolas Sarkozy in a French presidential election earlier this month, said: "We have to act straightaway for growth."
Merkel, who insists on structural reforms first despite waves of protests against austerity across the EU, said that eurobonds were not a route to growth and were not permitted under EU treaties.
Merkel, backed by the Netherlands, Finland and Sweden, said there had been "balanced" discussion on eurobonds and that several participants had expressed reservations.
A complicating factor is that Hollande's Socialists are campaigning in elections for a new majority in the French national assembly (parliament) and Merkel, weakened by the debt crisis, faces elections next year.
At Berenberg bank, analyst Christian Schulz said that Germany and its allies had rejected eurobonds as an "immediate fix", and commented that such bonds would remove incentives for reforms in weaker countries.
The EU summit on June 28-29 was likely to result in a "very modest" growth initiative, and there had been no progress on controlling contagion from the crisis, the analyst observed.
In Germany, press comment said that Hollande had taken the initiative with his proposals. The mass circulation Bild newspaper said that Merkel and Hollande had argued over eurobonds. "Never were EU member states — especially the euro-drivers Germany and France — so far apart in their demands as today," Bild said.
FROM: AGENCIES
Euro zone suffers worst PMI downturn in 3 years
