Investors are prepared for further evidence that recovery may be stalling across Europe as second-quarter growth figures are announced for the eurozone this week.
City analysts predict a modest 0.3 per cent average growth – despite Germany's continued strong performance. But investors were uneasy after Friday's news that, in the three months to June, growth collapsed to zero in France. Greece also disclosed much worse figures than expected – with its economy shrinking by 6.9 per cent in the second quarter.
President Nicolas Sarkozy is due to hold a crisis meeting with the German Chancellor, Angela Merkel, at the Elysée Palace on Tuesday in yet another attempt to improve "economic governance" of Europe's sovereign debt problems. Both leaders have called for their parliaments to ratify the latest Greek bailout by the end of September and have backed the European Central Bank to buy bonds when necessary to stop contagion. But some of Germany's coalition politicians have threatened to vote against these proposals.
In another sign of severe liquidity problems, the market for long-term debt almost closed down – Europe's banks have about ¤260bn of long-term debt to refinance by the end of the year. The iTraxx Financial Senior index reported levels of distress not seen since the start of the credit crunch. By contrast, equity markets recovered slightly, with the FTSE 100 closing up more than 3 per cent on the day – Paris's CAC and Frankfurt's DAX rose by about 4 per cent, aided by a ban on short-selling by financial institutions.
Daniel Gros, director of the Centre for European Policy Studies, said: "Euro governance is irrelevant. We have a liquidity problem now, which needs to be addressed immediately. Bringing EMU[economic and monetary union] back to safe ground will only succeed if debt and deficits are reduced substantially."
He added: "One without the other will not work, and EMU will fail. In today's environment, the central bank needs to look after financial stability, which means that it needs to assume the role of a lender of last resort to banks and governments. The question is not whether, but how this role is performed."
Ulrike Guérot, head of the European Council on Foreign Relations, said: "The EU has moved to short-term solutions and what the market needs is a long-term solution."
Euro Crunch Time
President Sarkozy faces a tough week as he hosts an emergency meeting on Tuesday with Germany's Chancellor, Angela Merkel, on how to resolve the eurozone's sovereign debt crisis. On page 84, Rodney Leach proposes a break-up of the euro. The northern states should adopt a new triple-A German mark zone, he says, leaving the southern countries with a devalued euro. And France? It stays with the south.