Recession fears deepen EU gloom

David Cameron said Italy now posed a danger to the eurozone's future (Reuters)

Fears of a new recession deepened Europe's economic gloom tonight with pressure mounting for firm decisions to restore the credibility of the single currency.

The announcement of a new - interim - leader to bring stability in Greece was matched by rising hopes of clarity in Italy, where Prime Minister Silvio Berlusconi, refusing to stand aside as promised until economic reforms are in place, may be gone this weekend.

In London Prime Minister David Cameron said Italy now posed a "clear and present danger" to the eurozone's future.

But claims that France and Germany were plotting a new "inner-core" of secure eurozone states were denied in Paris and Berlin.

Meanwhile today's coincidental Commission economic forecast delivered nothing to rally markets, with Economic and Monetary Affairs Commissioner Olli Rehn warning: "Growth has stalled in Europe, and there is a risk of a new recession."

Overall EU GDP (the combined national wealth of the 27 member states) is now projected to "stagnate" until well into 2012, with the Commission downgrading its growth forecast of 1.8% next year to just one half of one percent.

The only optimism was a projected return to "slow growth" of about 1.5% by 2013.

Mr Cameron repeated his call for eurozone leaders to act swiftly to save the single currency: "Italy is the third largest country in the eurozone.

"Its current state is a clear and present danger to the eurozone and the moment of truth is approaching.

"If the leaders of the eurozone want to save their currency then they - together with the institutions of the eurozone - must act now."

The Prime Minister warned: "The longer the delay, the greater the danger.

"Here in Britain, outside the euro, we must prepare for every eventuality - and that is exactly what we will do."

In Greece, former European Central Bank vice-president Lucas Papademos was installed as caretaker leader in an interim government whose urgent job is to approve the terms of more austerity measures in exchange for the latest slice of EU bail-out money to stave off bankruptcy for a few more months.

Greek elections are now likely in February, but the immediate political future remained unclear in Rome.

In Italy, President Giorgio Napolitano talked up the prospects of stability, insisting that the process of approving economic reforms demanded by Brussels could be completed in days instead of weeks.

Meanwhile Mr Berlusconi, who has pledged to resign, stays on, but Mr Napolitano said the reforms could be approved by the weekend.

That would clear the way for a new government, likely to be headed by former EU Commissioner and leading economist Mario Monti.

"Fears are totally unfounded that Italy may experience a long period of inactivity," insisted Mr Napolitano.

With debts of £1.6 trillion, Italy is considered too big for Europe to bail out, and high borrowing rates are making it tougher for the country to pay its way out of trouble.

European Commission President Jose Manuel Barroso led calls for the EU to "unite or face irrelevance".

He said the key was to deepen euro-area integration without creating divisions with those who are not yet in it.

If the euro area of the 17 single currency member states, or the entire 27-country EU, broke apart, he said, the estimated initial cost was up to 50% of EU GDP, with ongoing threats to the prosperity of the next generation.

Meanwhile Mr Cameron repeated that it is not in British interests for the eurozone to break up or for any countries in the eurozone club to leave:

"We have to keep the British economy safe, to take the British economy through this storm. That means preparing for all eventualities." he said.

PA