The head of the European Central Bank hit out at the political paralysis gripping the region as he warned the eurozone’s set-up was “unsustainable”.
By Louise Armitstead, Chief business correspondent
Mario Draghi said the central bank could not “fill the vacuum” left by member states’ lack of action as it was claimed the zone is on the point of “disintegration”.
Amid escalating talk of a potential bail-out for Spain, the president of the ECB said the central bank was powerless to stop the debt tornado. “It’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,” he said.
Olli Rehn, the EU’s top economic official, called for urgent action to “avoid a disintegration of the eurozone.” The economic affairs commissioner said that politicians had made progress but it had been “uneven and seemingly inefficient.”
Underling the fears gripping many investors, the FTSE closed down 7.5pc in May, suffering its worst month since February 2009 when the banking crisis was at its height.
A raft of poor economic data in America compounded fears for the eurozone and the global economy. US GDP expanded by just 1.9pc in the first quarter, rather than the 2.2pc first estimate, while jobless claims climbed.
The crisis raging in the Spanish regions and the country’s banks kept the country’s borrowing costs in the danger zone. The price of oil fell again although stockmarkets were calmer after Wednesday’s rout.
Christine Lagarde, the managing director of the IMF, was forced to deny reports on Thursday that said the fund was planning financial assistance to Spain.
“There is no such plan. We have not received any request to that effect and we are not doing any work in relation to any financial support,“ she said after a meeting with Spanish Vice President Soraya Sáenz de Santamaría.
Italy’s prime minister Mario Monti warned of the “huge possibilities of contagion”. Ireland looked set to approve the Fiscal Pact in its referendum but in Greece the anti-austerity Syriza party took the lead in some polls.
In a thinly disguised demand for action from Germany, Mr Draghi said leaders had to decide whether to stand by the current eurozone. “The sooner the vision is clarified the better for the European Union,” he told the European Parliament.
Pointing at the chaotic and ongoing rescue attempts of Bankia in Spain, Mr Draghi said the handling of the raging bank crises was the “worst possible way of doing things.”
He said politicians and regulators repeatedly underestimated the scale of their banks’ problems. “This is the worst possible way of doing things,” he said “Everyone ends up doing the right thing, but at the highest cost.”
Data showed investor confidence draining from the eurozone. Nearly €100bn of deposits was withdrawn from Spain in the first three months of the year.
Separate data showed that in May global investors pulled money of the equity markets and fled to safe haven investments. A survey of 57 investment firms from around the world found that around 7.1pc of their portfolios was held in cash, up 1.5 percentage points from April, and the highest level since the start of the crisis in 2010.
Madrid despatched its foreign minister, Soraya Saenz de Santamaria, to America, sparking hope on the markets that Spain would get a loan from the IMF. But the Washington-based fund denied any such plan.
Traders and politicians looked to Germany for signs of support. Angela Merkel, the German chancellor, refused to be drawn on demands for a “bank union” proposed by the European Commission but she agreed “there should be no taboos.”
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