Financial leaders of the G7 group of industrialised nations held an emergency ‘teleconference’ on the worldwide economic crisis yesterday.
Canada’s Finance Minister, Jim Flaherty, warned that the eurozone is on the brink of collapse.
‘The real concern right now,’ he said, ‘is that some eurozone countries have not taken sufficient action yet to address those issues of undercapitalisation of banks, and building an adequate firewall.’
Germany’s finance minister, Wolfgang Schaeuble, was equally explicit, insisting that popular movements against austerity must be resisted.
‘We cannot spare the affected countries the reform,’ he said.
With concern growing about Spain’s economy, eurozone leaders are split over whether to launch common bonds.
But Germany repeated its position that fiscal union must precede eurobonds.
Schaeuble said: ‘The government has always said that before we start talking about joint debt management, we need real fiscal union.’
Spain’s banking crisis and worries that Greece may be forced to leave the euro bloc have caused panic in the financial markets in the past few weeks.
And now there are fears Cyprus may be forced to join Greece, the Republic of Ireland and Portugal in seeking a bailout.
Schaeuble said Spain was doing ‘everything right’ with its austerity measures, but acknowledged that the country was under severe pressure because of a rise in borrowing costs, saying, ‘We need to manage this . . . through close and trusting co-ordination’.
Spain’s prime minister, Mariano Rajoy, has been holding talks with European leaders about trying to recapitalise the country’s banks.
Spanish bank Bankia has asked for 23.5bn euros (£19bn) to cope with its vast exposure to the property market.
Spain’s Treasury Minister Cristobal Montoro said in a radio interview yesterday that at current borrowing rates, the financial markets were effectively shut to Spain.
‘The risk premium says Spain doesn’t have the market door open,’ he said on Onda Cero radio. ‘The risk premium says that, as a state, we have a problem in accessing markets when we need to refinance our debt.’
New data yesterday also showed that the eurozone’s economies are slowing.
The Markit purchasing managers’ index fell to 46 in May from 46.7 in April, its lowest level in almost three years. A figure below 50 indicates contraction and slump.
German output fell for the first time in six months, while declines in Spain and France accelerated.
The eurozone’s private sector has now shrunk for four months in a row.
Markit’s chief economist Chris Williamson said: ‘Companies report business activity to have been hit by heightened political and economic uncertainty, which has exacerbated already weak demand, both in the euro area and further afield.’