Stock markets surged higher yesterday as Europe's key, Franco-German axis threw its weight behind efforts to prevent a eurozone break-up and stem the crisis threatening to engulf Spain.
German Chancellor Angela Merkel and President François Hollande's comments that "they are determined to do everything to protect the eurozone" following telephone talks cheered investors after European Central Bank president Mario Draghi's pledge on Thursday.
The show of unity encouraged investors to pile into shares, sending London's FTSE 100 Index 1 per cent higher, Germany's Dax up 1.6 per cent and France's CAC 40 2.3 per cent ahead. Leading shares in Spain – punished earlier this week as fears of a full-scale bailout loomed – bounced back nearly 4 per cent today.
Although they warned that eurozone members "must comply with their obligations", the two leaders said: "Germany and France are deeply committed to the integrity of the eurozone. They are determined to do everything to protect the eurozone."
The latest show of commitment eased the pressure on Spain after a hugely difficult week for the single currency bloc. Debt-market jitters pushed Madrid's borrowing costs soaring well above the 7 per cent mark, fears have resurfaced over a euro exit for Greece as it falls behind on the conditions of its €130bn (£102.16bn) bailout, and signs of weakness even emerged over the powerhouse German economy.
But Spain's benchmark debt costs fell for the second straight day to 6.7 per cent – although this still remains worryingly high for Madrid – as the news overshadowed another rise in unemployment to a record 24.6 per cent as austerity and recession bite. More than half of all people below the age of 25 are out of work.
The rally came as one of the City's most eminent financiers called for a dramatic temporary break-up of the eurozone. Lord Jacob Rothschild said a break-up and later reformation of the single currency bloc would be the best way of solving a sovereign debt crisis which has thrown the region's economy into reverse.
Speaking at an event organised by the Pi Capital investor network, he warned: "What if you allow a nervous breakdown of the great project to happen? You could have to have temporary separation of those countries to allow a very significant devaluation to take place."
ECB firepower is the solution
Comment by Russell Lynch
How often have investors been led up the altar by Europe's prevaricating politicians in the past two years only to face disappointment?
Nearly 30 summits in, Europe's leaders have consistently failed to produce the goods, leaving markets briefly euphoric before the reality of yet another fudge sets in.
The comments from the "Mollonde" alliance today are welcome – particularly after Mario Draghi's pledge to do "whatever it takes" to defended the euro – but there are huge hurdles still to overcome if Spain and Italy are to avoid a bailout.
Unlocking the full firepower of the ECB to create a genuine lender of last resort is the real solution, but Germany – on the hook for the bill – will take some convincing.
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