Euro is facing disintegration, Commission warns

The euro faces 'disintegration' unless European governments do much more to work together, the European Commission has warned.

The Spanish banking crisis entered its latest phase with the nationalisation of Bankia, one of the country’s biggest banks Credit: Photo: Getty

Olli Rehn, the economics commissioner, gave the warning as Mario Draghi, the head of the European Central Bank, criticised national leaders for a “lack of action” to help the single currency out of its crisis.

Spain remained at the eye of the financial storm yesterday, amid continuing fears for its banking sector.

Investors in Spanish banks are withdrawing money at a record rate, figures showed yesterday. More than £55 billion was withdrawn and moved out of the country last month.

Yesterday’s figures are for the month before the Spanish banking crisis entered its latest phase with the nationalisation of Bankia, one of the country’s biggest banks.

Even more money is thought to have left the country since then, raising fears that Spain is locked in an unbreakable cycle of market panic.

The flow of money out of Spain has raised fears that its banking system could collapse, requiring a bail-out that its government cannot afford.

Those fears are pushing up Spanish borrowing costs, which intensifies pressure on Spanish banks.

Underlining the fears gripping many investors, the FTSE 100 closed down 7.5 per cent in May, suffering its worst month since February 2009 when the banking crisis was at its height.

Ireland is voting in a referendum on the so-called “fiscal pact” that eurozone leaders agreed last year to commit themselves to balancing their budgets.

The result is expected to be announced on Friday.

A “yes” vote would commit the government to additional spending cuts, which could lead to widespread protests. A “no” vote would not derail the treaty, but could push Ireland’s bond yields – government borrowing costs – up again.

Despite months of market turmoil and repeated emergency summits, European leaders have made little progress towards measures that would persuade investors that the weakest eurozone members will be able to repay their debts.

Germany has continued to resist the creation of “Eurobonds”, which would see German taxpayers stand behind the debts of poorer southern countries.

Mr Rehn yesterday warned that, even if that scheme were ever approved, it would still not be sufficient to save the euro.

The single currency’s members needed “a genuine stability culture and a much upgraded common capacity to contain common contagion,” he said. “This is the case, at least if we want to avoid a disintegration of the eurozone and if we want it to survive.”

The euro crisis eased temporarily earlier this year after the ECB made cheap loans to European banks. But the relief has proved temporary, and bond yields are rising again in Spain and Italy.

Mr Draghi yesterday tacitly accused eurozone governments of squandering the opportunity the central bank had offered them.

“Can the ECB fill the vacuum of lack of action by national governments on fiscal growth? The answer is no,” Mr Draghi told the European Parliament. “Can the ECB fill the vacuum of the lack of action by national governments on the structural problem? The answer is no.”

Mr Draghi and Mario Monti, the Italian prime minister, both piled more pressure on Angela Merkel, the German chancellor, to stop blocking moves to pool the borrowing of eurozone members.

Mr Monti yesterday warned that Mrs Merkel’s entire economic agenda “risks being undermined because of lack of promptness in setting up the necessary instruments to limit the contagion.”