The European Commission today warned Europe was facing into a new economic recession as figures showed euro area growth at a virtual standstill.
As the political and economic crisis in Italy spurred fears of a split in the euro zone, the European commissioner for economic and monetary affairs Olli Rehn said: “Growth has stalled in Europe, and there is a risk of a new recession".
He was speaking as the EU's autumn economic forecast for next year said confidence had “sharply deteriorated” and was now adversely affecting investment and consumption.
Overall EU GDP - the combined national wealth of the 27 member states - is now projected to “stagnate” until well into 2012.
The forecast growth for next year is about one half of one per cent - although by 2013 a return to “slow growth” of
about 1.5 per cent is expected.
The bleak economic outlook came as EU sources confirmed that French and German officials had held discussions on a two-speed Europe with a smaller, more tightly integrated euro zone and a looser outer circle.
The discussions among senior policymakers, still in the realms of the theoretical, have focused on how to protect the euro zone from breaking up via tighter common policies which some members may by unable or unwilling to live with.
A German government spokesman said today that Berlin was not pursuing the idea of a smaller euro zone.
Germany chancellor Angela Merkel said today that stabilising the euro zone in its current form was the top priority for her government. "We only have one goal, that is to bring about a stabilisation of the euro zone in its current form," Dr Merkel told reporters at a news conference with Romania's president in Berlin.
The euro rose from a one-month low against the dollar today and top-rated government debt fell whileworld stocks held above a three-week trough on hopes that new governments being formed in Italy and Greece could help fend off a euro zone break up.
Asian shares fell more than 3 per cent after similar falls on Wall Street and in Europe as investors took fright at the accelerating sovereign debt crisis and at buck-passing among European leaders and institutions.
As the crisis accelerated, European Commission president Jose Manuel Barroso issued a stark warning of the dangers of a split in the European Union.
"There cannot be peace and prosperity in the North or in the West of Europe, if there is no peace and prosperity in the South or in the East," Mr Barroso said in a speech in Berlin.
The European Central Bank's hardline chief economist told governments not to expect the bank to rescue them with unlimited funds, despite its efforts to stabilise runaway bond markets.
"We are not the lender of last resort and I do not advise European governments to ask the ECB to become lender of last resort," Juergen Stark, who will quit his post in protest at continued bond-buying told a conference in Frankfurt.
"This will mean that the ECB immediately will lose its independence." It was not clear to what extent he spoke for new ECB president Mario Draghi, but the central bank has so far opposed any role in helping to leverage the euro zone's rescue fund.
The ECB, the only effective bulwark against market attacks, intervened to buy Italian bonds in large amounts on yesterday and was back in today but Italy's 10-year bond yields have shot above 7 per cent, a level widely deemed unsustainable.
One euro zone official said the bloc was not making any plans to bail out Italy, which is deemed too big to save with the €440 billion European Financial Stability Facility.
"Financial assistance is not in the cards," the official said, adding that the bloc was not even considering extending a precautionary credit line to Rome.
A second official said: "The ECB will be drawn like every one else by the weight of gravity (to act)."
However, three ECB policymakers said today it cannot intervene more aggressively to tackle the euro zone debt and they pressed governments to act instead.
Dutch central bank president Klaas Knot, a member of the ECB's 23-member policymaking Governing Council said: "We have gone pretty far in what we can do but there is not much more that can be expected from us".
"It is now up to the governments ... to make sure the doubts about sustainability, about repayment of individual government debt are removed as quickly as possible." A Bundesbank spokesman said separately that there had been no ECB crisis meeting yesterday or today.
Mr Knot's comments echoed a warning to European governments from German ECB policymaker Juergen Stark late yesterday not to rely on the bank's help.
Despite the intensification of the crisis, the ECB has not delivered the kind of 'shock and awe' intervention that could calm markets.
"The more risk we take on, the more difficult it will be to neutralise the effects from this money creation. Then we land at the quadrant where we would have put on the money printing press," Mr Knot said.
To date, the ECB has distinguished itself from the US Federal Reserve and the Bank of England by refraining from embarking on a policy of "quantitative easing" - code for printing more money.
Instead, the ECB sterilises - or neutralises - its bond buys by conducting weekly liquidity absorbing operations equal to the cumulative size of its debt purchases.
In Germany, the legacy of hyperinflation in the 1920s has left people with a strong aversion to price rises. German policymakers are steadfastly opposed to the ECB engaging in quantitative easing for fear it could be inflationary.
Agencies
