The Euro Zone Crisis is Back

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Following a fractured Italian election result the heat is back on the Euro Zone with its auster-ity mantra offering little to douse growing so-

cial unease in southern Europe. The European Central Bank’s pledge to do whatever it takes to save the euro took some heat out of the debt crisis but unless Italy can establish a durable, reform-minded government it might have put itself outside the ECB’s protection, opening a dangerous chink in the currency bloc’s ar-

mour and creating the conditions for the crisis to flare up again. Could that be spur to galvanise policymakers again, following signs they have soft-pedalled on closer economic integration and building a banking union in recent months? The Reuters Euro Zone Summit held over four days in Brussels, Frankfurt, Paris, Madrid and London pressed a dozen of Europe’s top policymakers on their plans, hopes and fears and whether they expect the ECB to have to back up its words with actions.

An illuminated euro

sign is seen in front

of the headquarters

of the European

Central Bank (ECB)

in the late evening

in Frankfurt January

8, 2013. REUTERS/

Kai PfaffEnbach

REutERs EuRo zonE summit 2013

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Eu’s Barroso urges leaders to stick to austerity goalsBy LukE BAkER And miChAEL stott

BRussELs, FEBRuARy 26, 2013

European Commission President Jose Manuel Barroso appealed to EU leaders not to give in to populism on

Tuesday after Italian voters roundly reject-ed the austerity policies pursued by outgo-ing prime minister Mario Monti.

Speaking at a Reuters summit on the fu-ture of the euro zone, Barroso said efforts to revive Europe’s economy would take time and required determination. The fact Ital-ian voters had turned Monti out of office did not mean his policies, or those advo-cated by the European Union, were wrong.

“I hope we are not going to follow the temptation to give in to populism because of the results in one specific member state,” Bar-roso, speaking with passion, said of the EU’s efforts to combat the sovereign debt crisis.

“The question we have to ask ourselves is the following: should we determine our policy, our economic policy, by short-term electoral considerations or by what has to be done to put Europe back on the path to sus-tainable growth? For me the answer is clear.”

Monti won just 10 percent of the vote in the Sunday/Monday poll, with Italians overwhelmingly backing the movements of former prime minister Silvio Berlusconi and comedian campaigner Beppe Grillo, both of whom reject EU-backed austerity.

Financial markets reacted with alarm. Yields on Italian 10-year government bonds, which reflect the degree of risk in-vestors attach to the country, rose sharply and share prices in Milan tumbled.

The result leaves the euro zone’s third largest economy facing an extended period of political uncertainty, with the prospect of another round of elections if a government cannot be formed. In that respect, Italy is mirroring Greece, the euro zone country that sparked the region’s debt crisis.

Barroso said it was incumbent on all EU and euro zone countries, especially those receiving aid from the bloc’s rescue funds, to retool their economies and cut deficits in an effort to improve competitiveness and stimulate growth.

Such a prescription had worked for Lat-via and was showing results in Portugal, Ire-land, Spain and Greece, he said, with current account deficits narrowing, unit labor costs falling and exports beginning to pick up.

While the demands of austerity pro-grams, including deep spending cuts and changes to pensions and labor markets, were harsh and unpalatable to many, they were necessary, he said.

“It is true that the economic policy that we are implementing in the EU because of the financial crisis is a real challenge for po-litical leadership,” Barroso acknowledged.

“This requires determination, consisten-cy and coherence over time. We never said it would be easy, it’s going to be difficult, and it will remain difficult.”

But he said the Commission would not be unnecessarily rigid when it comes to tar-gets, providing extra room to meet deficit goals where necessary, as has already hap-pened with Greece, Portugal and Spain and may be required for France.

“We have to have a mix of policies that keep the root of fiscal consolidation and at the same time promote growth,” he said. “Growth is the answer and growth is the goal.”

Germany, as the bloc’s largest economy, had a particular leadership role to play and should open up its service sector more sig-

nificantly, work to increase female partici-pation in the workforce and allow wages to rise with productivity.

“We need leadership, democratic leader-ship, that has the courage to resist short-term considerations and the ability to ex-plain to the public what is at stake and what will be the consequences of following an ir-responsible path,” Barroso said.

Such a path would include any delay in implementing reform programs or advo-cating more public spending, he said, em-phasizing that leaders could not afford to delay or be complacent in overhauling their economies.

“It’s quite clear after the biggest finan-cial crisis in the euro area there are very tough policy decisions to be taken and implemented, and for that we need coura-geous leadership and leadership that is ef-fective not only in taking decisions but in communicating them,” he said.

“We should be serious when we discuss economic policy and not give up to imme-diate political or party considerations.”

Despite the turmoil that has shaken

European union Commission President Jose

manuel Barroso answers reporters’ questions

during the Reuters Future of the Euro zone

summit in Brussels February 26, 2013.

REUTERS/fRancoiS LEnoiR

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Barroso says confident uk will stay in EuBy PAuL tAyLoR And mikE PEACoCk

BRussELs, FEBRuARy 26, 2013

European Commission President Jose Manuel Barroso said on Tuesday he was convinced Britain would vote to

stay in the European Union if a promised referendum takes place, despite opinion polls showing a plurality in favor of leaving.

However, he also told a Reuters Sum-mit on the future of the euro zone the EU could not revise its policies just because one country was thinking of holding a vote on continued membership.

Prime Minister David Cameron prom-ised last month to give Britons an in-out choice on whether to remain in the 27-na-tion bloc if he is re-elected in 2015, after trying to negotiate a reform of EU policies to meet British concerns.

“Knowing Britain a little bit, and know-ing how important the business community is and the role that different parts of Brit-ish society can have on this open debate, in case there is a referendum, I am confident that Britain will remain a member of the European Union,” Barroso said.

Cameron’s Conservative party wants to “repatriate” to London EU powers over a range of social, employment, justice, police and fisheries policies. His Liberal Democrat coalition partners and the main opposition Labour Party both support EU membership.

However, the Eurosceptical UK Inde-pendence Party and some dissident Con-servatives favor outright withdrawal from the bloc, and latest opinion polls show about half of Britons want to leave while just a third say they would vote to stay.

Barroso lauded Britain’s contribu-tion to Europe, notably in promoting

the single market for goods and services, the EU’s eastward enlargement, its open trade policy and its leading role in the fight against climate change.

But he conceded it was a “reluctant part-ner” when it came to institutional issues.

The head of the EU executive, which proposes legislation and enforces European rules, said he was convinced ways would be found to enable the 17-nation euro zone to move forward in closer integration while keeping Britain on board.

He cited as an example an agreement in December to create a single banking super-visor for the euro area, in which solutions were found to accommodate British inter-ests even though London has no intention of joining a European banking union.

Barroso said he understood some Brit-ish concerns about EU authority stretching

into too many areas of national life, and the EU should be self-critical, assess its perfor-mance and make improvements that could respond to those concerns.

But he added: “With the greatest of respect for Britain as a member state, we cannot now because one country has a ref-erendum, or signals the possibility of hav-ing a referendum, put into question all of our policies because of the concerns of that one country.”

Editing by Mike Peacock

interview transcript: Click here

Video: click here

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European union Commission President Jose manuel Barroso gestures as he answers questions during

the Reuters Future of the Euro zone summit in Brussels February 26, 2013. REUTERS/fRancoiS LEnoiR

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italy vote raises risk of euro contagion: schaeubleBy noAh BARkin And miChAEL stott

BERLin, FEBRuARy 27, 2013

German Finance Minister Wolfgang Schaeuble said on Wednesday that Italy’s inconclusive weekend elec-

tion had raised the risk of market turmoil spreading to other euro countries and urged Italian politicians to form a stable govern-ment quickly.

Speaking to Reuters from the finance ministry in Berlin as Italy’s borrowing costs hit their highest level in four months, Schaeuble said it was too early to declare the euro crisis solved.

“The election result in Italy has sparked doubts in the market that a stable govern-ment can be formed. When such doubts arise there is a danger of contagion. We saw this last year when elections in Greece led to political uncertainty. Other countries are then infected,” Schaeuble said.

Yields on benchmark 10-year Italian government bonds hit 4.9 percent in the wake of the election. This was well below 2011 crisis highs of 7.3 percent but sharply higher than the 4.1 percent level at which they traded last month.

“Now it is up to those who were elected in Italy on Sunday to form a stable govern-ment. The faster they do this, the quicker the uncertainty will be overcome,” Schaeu-ble added.

“And by the way, I never said the euro cri-sis was over. I only said that we have made significant progress. We need to continue on this path, but we will have setbacks.”

No party won an overall parliamentary majority in Italy’s vote, rattling investors in

the euro zone’s third largest economy and rekindling concerns that the bloc’s three-year old crisis could intensify after several months of relative calm.

On Wednesday, solid demand at an Ital-ian government debt auction brought some relief, pushing European shares and the euro higher. But there were also signs that foreign investors had stayed away from the bond sale.

Schaeuble, 70, has played an important role in shaping Germany’s response to the cri-sis, pushing the idea that southern euro states must consolidate their budgets and reduce debt in order to win back market confidence.

The course has led to much economic pain in countries like Greece, Spain and Portugal, where unemployment has shot higher and living standards have fallen.

Speaking to Reuters on Tuesday, Schaeu-ble’s French counterpart Pierre Moscovici said the Italian vote, which delivered strong scores for former premier Silvio Berlus-coni and upstart comic-turned-politician Beppe Grillo, showed austerity had gone far enough.

But Schaeuble stated that he saw stable finances as a condition for growth and said France needed to introduce structural re-forms of its own to boost growth.

“France must also do more here,” Schaeuble said. “(French President Fran-cois) Hollande knows this and so does Pierre Moscovici.”

Turning to the Mediterranean island of Cyprus, which is in talks with European of-ficials on a bailout for its banks, Schaeuble said he hoped for an agreement before Eas-ter, which falls at the end of March.

He made clear that Russia must make a contribution, although he declined to ad-dress speculation that European officials may seek to “bail in” Russian depositers by forcing them to take losses on their holdings.

“Russia is involved because Russia made a not-insignificant loan to Cyprus and also because Russian investors have a very high level of deposits in Cyprus,” he said.

He struck a positive note on the Ger-man economy, which contracted by 0.6 percent in the fourth quarter of 2012 as exports to euro zone partners dried up, sug-gesting Germany could tolerate another year of solid wage rises.

The country’s IG Metall union said on Wednesday it would seek salary hikes of up to 5.5 percent this year for its 3.7 million workers in the metal-working and electri-cal sectors.

“We had a weak fourth quarter last year, but all signs are now pointing to a broad-based recovery in Germany,” Schaeuble said.

“We will need to cultivate this, not only the politicians but also those negotiating wages,” he added, saying that a narrowing of labor cost differentials between Ger-many and southern euro countries would bring stability to the single currency bloc.

Additional reporting by Gernot Heller; Writing by Noah Barkin, Editing by Michael Stott

German Finance minister Wolfgang schaeuble

attends a cabinet meeting at the Chancellery in

Berlin, February 6, 2013.

REUTERS/fabRizio bEnSch

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spain no nearer bailout after italy vote: finance ministerBy JuLiEn toyER And CARLos RuAno

mAdRid, FEBRuARy 26, 2013

Spain is no closer to seeking bond-buying help from the European Central Bank than it was before It-

aly’s election, which has triggered renewed market turmoil, Economy Minister Luis de Guindos said on Tuesday.

De Guindos also told Reuters in an inter-view that he would push ahead with planned tax cuts for 2014 and beyond while maintain-ing deficit-cutting efforts in a drive to create growth and pull Spain out of recession.

“Spain is not closer or further from an OMT program than it was 24 hours ago,” he said.

“We should not pay too much attention to the short-term reaction of the markets because markets usually overshoot in the short-term. What I hope and expect is that Italy will finally and eventually get a stable government which will continue with the reform agenda.”

The ECB has taken much of the sting out of the euro zone debt crisis by pledging to buy as many government bonds as nec-essary to shore up the currency bloc via a program called Outright Monetary Trans-actions (OMT).

The verbal promise alone has been enough to drive down borrowing costs, at least until Italy’s election.

The premium investors demand to hold Spanish 10-year debt rather than the Ger-man benchmark jumped to 393 basis point on Tuesday, a level not seen in several weeks. Spain’s blue-chip index Ibex .IBEX was down 2.7 percent at 1600 GMT.

Earlier on Tuesday, Spanish Foreign Minister Jose Manuel Garcia-Margallo sounded more alarmed, saying there was a feeling of “extreme concern” over possible movements in bond spreads in reaction to potential Italian political gridlock.

But de Guindos said neither market jit-ters nor the bleaker economic outlook re-leased last week by the European Commis-sion would deviate the government from its economic policy.

Spain, which implemented strong auster-ity remedies to cut its public deficit from 9.4 percent of gross domestic product in 2011 to close to 7 percent in 2012, has now started to implement more growth-oriented policies.

De Guindos said the government hoped the European Commission would grant the country a more “sensible” deficit-cutting path over the next three years. Madrid has already been given an extra year to meet strict deficit targets and is now hoping for another.

While ruling out new budget cuts for 2013, he said the priority for 2014 was to combine fiscal consolidation with stimulus policies, including tax cuts Prime Minister Mariano Rajoy committed to when he took office in December 2011.

“These are commitments that we have. We’ll have to combine this commitment with the continuation of the fiscal consoli-dation effort. We think it will be positive and will be possible over the next months,” de Guindos said.

He said the new approach would be reflected in the economic program Spain will send to the European Commission by April 1, which that will cover 2013, 2014 and 2015.

Spain, which has taken advantage of improved market conditions to sell close to 25 percent of the debt it plans to issue this year, has set four priorities to keep interna-tional investors on its side.

It wants to complete the euro zone’s

planned banking union, keep control of its finances including those of the 17 autono-mous regions, to finish the clean-up of its banks and to deliver structural reforms it has committed to.

This, he said, would go a long way in closing the gap between the north and south of the euro zone.

“There are not first-class or second-class passengers. We are all in the same boat ... despite the fact that we had seen an in-creasingly higher fragmentation in capital markets,” he said.

The ECB bond-buying program was a backstop for Spain’s struggling economy, but was no substitute for those reforms.

The government, over the next two to three months, will table a reform of the pension system, put forward new laws to make the economy more competitive and boost access to credit and sell nationalized lenders, de Guindos said.

The sale of lender Bankia (BKIA.MC) and smaller former savings bank NCG Banco are still a remote prospect but Cata-lunya Banc is more advanced, with the win-dow for non-binding bids closing at the end of the week.

spain’s Economy minister Luis de Guindos bites

his glasses as he attends the state of the nation

debate at Parliament in madrid February 20,

2013. REUTERS/SERgio PEREz

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French finance minister: “Worrying” italy vote shows Europe needs growth

By JEAn-BAPtistE VEy And mARk John

PARis, FEBRuARy 26, 2013

Italy’s inconclusive election shows Eu-rope’s leaders must give voters across the region hope of stronger growth to offset

painful austerity, French Finance Minister Pierre Moscovici said on Tuesday.

France’s Socialist government, which last week acknowledged it will not hit its 2013 deficit-cutting target, has long insisted that efforts to rein in debt across the euro zone must be counter-balanced by measures to bolster its sickly economies.

Germany and others are less keen on that view.

Moscovici said the political deadlock emerging from Italy’s general election was “no doubt a worry” and hoped that centre-leftist Pier Luigi Bersani would be able to use his lower house majority to form a solid and reformist government.

But while he said the painful austerity reforms undertaken by outgoing technocrat premier Mario Monti had been necessary, he told the Reuters Euro Zone Summit that Italy and Europe also needed to be given “another perspective”.

“The message from Italy is: ‘Be careful, when you are in a situation in which you ask populations to make sacrifices for long periods, at the end you risk having pro-tests’,” Moscovici said in his Paris office.

“There needs to be another perspective - which is growth again,” he said in an in-terview, one of a number Reuters is con-ducting with top euro zone policymakers this week.

Defending France’s call to be granted another year to hit a 2013 target of cutting its public deficit to three percent of output, Moscovici said further cuts than those al-ready announced by President Francois Hollande were not possible given France’s anemic growth rate and unemployment stuck at over 10 percent.

“That’s why I don’t want us to do the three percent now ... if we did, we’d kill off the little (2013) growth we have of around 0.1 percent and we would set ourselves up for a political and social crisis that at some point would feed into populism at election time,” he said.

“What I am asking for is some time, not an indulgence. I think the European Commission understands France’s situa-tion ... For me, France made the effort that was needed in 2013 and I promise that in 2014 we will do all we can to ensure that the deficit is below three percent.”

Moscovici put the 2012 deficit at around 4.5 percent and noted the Commission

forecast that the deficit would fall to 3.7 percent this year. He did not give a new set of forecasts but reaffirmed the mid-term aim of a balanced budget in 2017.

Asked about signs of a growing diver-gence between France, the euro zone’s sec-ond largest economy, and EU economic powerhouse Germany, Moscovici pointed to efforts to boost the French business sec-tor through tax breaks of labor reforms.

“This is the reason why this government is deeply committed to implementing a strong policy to regain competitiveness ... It’s by investment it’s by hiring that we will find the perspective of growth and employment.”

A committed pro-European who voted in favour of the EU constitution thrown out in 2005 by French and Dutch voters, Moscovici nonetheless said measures to promote growth should take precedence over new moves to deepen EU integration.

“The people in Europe will only believe again in Europe if they see perspectives of growth and employment. If people feel that Europe is too far away from them, if they feel that Europe is only sacrifice, if they feel that Europe doesn’t create fairness, then there is no way to have a stronger institu-tions for Europe,” he said.

Additional reporting by Yann Le Guernigou and Leigh Thomas. Editing by Catherine Bremer/Mike Peacock

France’s Economy,

Finance and Foreign

trade minister Pierre

moscovici leaves 11

downing street in

London February 25,

2013. REUTERS/SUzannE

PLUnKETT

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Bond-buying plan is there to be used: ECB’s CoeureBy PAuL CARREL And sAkARi suoninEn

FRAnkFuRt, FEBRuARy 27, 2013

De Guindos also told Reuters in an intervieThe European Central Bank’s bond-purchase program is

“not a nuclear deterrent” and is available for use, ECB policymaker Benoit Coeure said, with Ireland and Portugal candidates to tap the plan when they gain more access to debt markets.

The ECB launched the program - dubbed Outright Monetary Transactions (OMT) - last September to counter inves-tor fears of a euro zone break-up but it has yet to deploy it, with some policymakers at the bank preferring to keep it under wraps.

Coeure, the ECB Executive Board member in charge of market operations who would supervise day-to-day running of the OMT, said the program was ready for use if countries had bond market access and an aid plan with Europe’s bailout fund.

“No, it’s not a nuclear deterrent,” Coeure said in a discussion at a Reuters summit on the future of the euro zone, when asked if it would be best for the plan never to be used.

“They are here to be used if countries meet the conditions,” he said. “So this is the discus-sion that we’re having in particular when it comes to Ireland and Portugal, that OMTs can be available at some point when countries have regained sufficient market access, which is not the case today in our judgment.”

Portugal and Ireland, both of which are recipients of European aid, have begun re-turning to debt markets and Irish Finance Minister Michael Noonan said last week his country plans to apply for the OMT

plan but not just yet.To qualify “we need to see issuance at

different points along the curves and we need to have a sense that issuance is regu-lar,” Coeure said. “On our side, we’re ready.”

Not all ECB policymakers are keen on the plan. Belgium’s Luc Coene, a member of the 23-man policymaking Governing Council that includes the six Executive Board mem-bers, said last month the program was like a nuclear deterrent, better not used.

Bundesbank chief Jens Weidmann was the only Council member to oppose the plan from the outset, which he described as “tantamount to financing governments by printing banknotes”.

Weidmann is also concerned that the calming effect the OMT program has had on financial markets has reduced the incen-tive for euro zone governments to reform. Coeure concurred.

“There is a risk that the relative calm

in financial markets weakens incentives to move forward, so there is wisdom in that remark,” he said. “We have to show that re-forms are already bearing fruit.”

When ECB chief Mario Draghi began forming the OMT plan last July, yields on Spanish bonds were well above 7 percent. Now they are trading just above 5 percent though they were led higher by Italian yields after Italy’s inconclusive election.

The ECB would not respond to that sort of move and it would be a mistake to think it was fixated on the fluctuations of govern-ment bond yields, Coeure said.

“If yields go up because of political events, there is not much the ECB can do, that’s not related to monetary policy whatsoever,” Coeure said. “What matters to us is how monetary policy signals are transmitted to the real economy. I would focus more on say lending to companies, to households.”

The ECB was reviewing its collat-eral framework to make cheap money more accessible to small- and mid-sized firms, he added.

Coeure also said concerns about Ire-land’s bank debt restructuring being mon-etary financing would be alleviated if the plan allowed the Central Bank of Ireland to sell the government bonds acquired through the deal quicker.

Turning to his native France, Coeure joined the ECB’s German policymakers - Weidmann and Joerg Asmussen - in press-ing Paris to reduce its deficit as close as pos-sible to its 3 percent/GDP goal this year.

“We would like to see action in 2013, because we think it is a matter of cred-ibility,” he said. “We need to see corrective action not on taxes, but on spending, and action should be taken this year.”

Additional reporting by Mike Peacock, Luke Baker and Paul Taylor in Brussels

Benoit Coeure, executive board member of the

European Central Bank (ECB) poses for a photo

after an interview with Reuters in Frankfurt

February 26, 2013. REUTERS/RaLPh oRLowSKi

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Eu trade chief hopes to clinch u.s. trade deal by late 2014By RoBin Emmott

BRussELs, FEBRuARy 27, 2013

The United States and European Union cannot afford to let transat-lantic trade talks fail after they are

launched in June, the EU’s trade chief said on Wednesday, warning that both sides’ standing and prosperity in the world de-pended on their success.

Washington and Brussels will begin talks towards a deal encompassing half the world’s economic output just a few months after the EU launches talks with Japan in March, EU Trade Commissioner Karel De Gucht told the Reuters Euro Zone summit.

Benefits to the U.S. and EU economies, suffering from the aftermath of global fi-nancial crisis, could be tangible even before a deal is signed, while wrapping up talks by the end of 2014 was “not impossible” De Gucht said in Brussels.

“This is about the weight of the western, free world in world economic and politi-cal affairs,” said De Gucht, one of the EU’s most powerful commissioners who is nego-tiating trade deals with more than 80 coun-tries on behalf of the EU’s 27 countries.

“Once we have started, failing is not an option. It would be very detrimental for both the European Union and the United States if we were not to succeed,” he said.

U.S. President Barack Obama endorsed talks this month and the EU’s leaders have also backed the plan, hoping a deal with Washington will help Europe pull out of its debt crisis.

At a time when the euro zone is in re-cession and the United States expects only modest growth this year, an EU-U.S. trade

deal could add 0.5 percent a year to the EU economy and 0.4 percent to the U.S. economy by 2027.

De Gucht said the deal was so weighty that signs of progress, before completion of a deal, could have a positive economic effect. But the reverse was also true, he warned.

Following the collapse of global trade talks in 2008, both the United States and Europe have sought to tie up as many free-trade agreements as possible and this bilateral accord represent the pinnacle of those ambitions.

Such a deal was first discussed three de-cades ago and considered too difficult be-cause of policies protecting the farm sector on both sides of the Atlantic.

De Gucht said agriculture would be part of the discussions. “We have chosen the path of a deep and comprehensive agree-ment,” he said, saying barriers for compa-nies in areas ranging from data protection to regulation and government contracts could disappear.

De Gucht, a former Belgian foreign minister, said while there were no deadline, November 2014 represented a good target for a U.S. accord because his term as trade commissioner ends then and the United States holds midterm elections.

After that, six months could be lost, he said.

De Gucht also said the current value of the euro did not represent a problem for the EU’s exporters. “The euro is not at a forbid-ding level” for European trade, he said.

Not content with an accord with the United States, the European Union will launch trade talks with Japan, the world’s third largest economy at the end of March in Tokyo, De Gucht said. But he said the going would be slower.

An EU-Japan accord would bring to-gether two trading partners responsible for a third of global economic output and could

create 400,000 jobs in Europe alone. But the complexity of the negotiations meant it could take several years to reach a deal.

“This is a negotiation that is going to take time. I don’t think you could do it in less than three years,” De Gucht said.

“With the United States, we have to crack a number of very hard nuts, but we at least we know them. In Japan, it’s very much about internally changing a mentality,” he said.

France and Italy have been worried

European union trade Commissioner karel de

Gucht looks on during the Reuters Future of the

Euro zone summit in Brussels February 27, 2013.

REUTERS/fRancoiS LEnoiR

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Eu gamble risks killing uk’s “golden goose”: mandelsonBy AndREW osBoRn And

Guy FAuLConBRidGE

London, FEBRuARy 25, 2013

Prime Minister David Cameron risks wrecking Britain’s financial center with his bid to wrest back powers

from the European Union ahead of a vote on whether to leave, one of the UK’s most influential Europhiles says.

Peter Mandelson, once one of Britain’s most powerful men, told Reuters Cam-eron was imperilling the country’s future by promising to claw back powers from the EU and to hold an in-out membership ref-erendum by the end of 2017.

Attempts to negotiate a new type of EU membership for Britain would fail, the former government minister and EU trade commissioner said, while a ‘Brexit’ would isolate its $2.5 trillion economy and un-dermine the City of London’s position as Europe’s financial capital.

“I don’t see any circumstances in which Britain’s financial sector and the City of London can thrive or flourish if we are not an integral part of the single financial ser-vices market in Europe,” Mandelson said in an interview which kicks off a four-day Reuters euro zone summit featuring inter-views with Europe’s top policymakers.

“We risk killing the golden goose, which in any case has done a pretty good job of shooting itself in the foot already, but which nonetheless remains a key compo-nent of our GDP and an important eco-nomic driver in Britain.”

London is home to over one third of the global foreign exchange market, though its bankers have been castigated by voters and

politicians for causing the 2008 financial crisis.Mandelson, one of the architects of for-

mer Prime Minister Tony Blair’s “New La-bour” Party and a cabinet minister in the governments of Blair and Gordon Brown, said Cameron’s European policy was schizophrenic because so many members of his ruling Conservative Party wanted him to get Britain out of the EU.

“It’s rather schizoid. He describes the EU in positive and flattering terms ... then on the other hand the other David Cam-eron talks about the EU as if it’s some alien body, some sort of monster, something that’s attacking us rather than serving us.”

Mandelson warned that Cameron was staking Britain’s future place in the world on an unpredictable referendum that could easily be hostage to domestic issues.

“When you think what’s at stake for us politically and economically it’s a heck of a gamble,” said Mandelson, a member of a group of senior politicians who have come together since Cameron’s January 23 speech offering a referendum to campaign for British to stay inside the EU.

Mandelson, who refused to call the out-come of a possible referendum, said the Brit-ish public were split three ways: one third keen to stay in, one third ready to leave and one third wanting to reform the EU.

Cameron says he also wants Britain to remain a member of the EU, but that the 27-member bloc needs reform, greater accountability, and that Britain needs a new settlement.

He insists a new round of euro zone in-tegration will require treaty change, giving him the opportunity to renegotiate Britain’s terms of EU membership.

Critics fear he will get little change from EU partners and could inadvertently push Britons into deciding to leave.

Mandelson said Britain could not cherry pick its membership terms “as if it’s a cafe-

teria service where you bring your own tray and pick out what’s on offer and then leave.

“That’s not how the European Union works.”

If Britain sought consensual change as a central player in European affairs then London could defend its economy and help shape the EU’s future, he argued.

“If on the other hand we are saying you have got to revise all your treaties to create a separate category of membership for Brit-ain, then forget it,” Mandelson said.

He said isolation and ultimately insignifi-cance awaited Britain outside the EU, whose $16.5 trillion economy makes up about 22 percent of global gross domestic product, according to IMF data. Britain’s economy makes up 3.4 percent of global GDP.

“If Britain was out of the EU, we simply would not have an economic future in set-ting ourselves up as some Swiss-style safe haven for derivatives trading and hedge fund industries and for those who want to dodge taxes,” he said.

Mandelson, who served as European Commissioner for trade from 2004 to 2008, said many British people were reluc-tant Europeans, but that British interests were best served by being at the top table of European decision-making.

“It boils down to this: Britain’s ability to shape the regulatory agenda from the in-side,” he said. “Frankly I think the City has got to do a darn site better job of ... bring-ing home to people the importance of its role in our economy and what the dangers are of our drifting apart from Europe.”

As the euro zone economy recovers from a sovereign debt crisis after the Eu-ropean Central Bank’s pledge to save the euro, Britain could find its financial sector migrating to the continent if it tried to dis-tance itself from Europe, he warned.

cLicK hERE To conTinUE REading

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Eu’s Barnier: banker bonus curb good for BritainBy John o’donnELL And PAuL tAyLoR

BRussELs, FEBRuARy 28, 2013

Prime Minister David Cameron risks wrecking Britain’s financial center with his bid to wrest back powers

from the European Union ahead of a vote on whether to leave, one of the UK’s most influential Europhiles says.

Britain should welcome a cap on bank-ers’ bonuses agreed by European Union lawmakers on Thursday as a fair response to taxpayers’ anger over the huge cost of rescu-ing imprudent banks, Europe’s top finan-cial regulator said.

EU Internal Market Commissioner Michel Barnier said he did not believe the curbs would drive banks out of the City of London, Europe’s biggest financial centre, to less regulated markets outside the European Union such as Switzerland or Singapore.

“I don’t think it is likely that banks that have an interest in working today and to-morrow in the single market will take the risk of leaving the single market simply be-cause of this reason of the remuneration of their executives,” he said at a Reuters Sum-mit on the future of the euro zone.

He was speaking hours after EU law-makers, country representatives and the executive European Commission struck a provisional deal on new banking regulation including higher capital requirements and increased transparency by banks.

A ceiling on bonuses, the only one of its kind globally, is perhaps the most radical aspect of the new rules, and runs the risk of establishing an uneven global playing field

that could put European banks at a disad-vantage in attracting staff.

Barnier rejected criticism of the regu-lation, which will hit Europe’s financial capital, London, hardest, saying it was just one aspect of a broader rulebook that would make Europe’s financial system more stable and transparent.

The former French foreign minister said bankers needed to understand citizens’ out-rage at having to pick up the cost of reckless risk-taking encouraged by the bonus culture.

“Banks, like hedge funds, are not out-side society. They are a part of society and it is in their interest to pay heed to what citizens think. The time has come for a bit of moderation.”

The fact that Europe was drawing the lessons from past misbehavior “is positive for British citizens,” he said, adding that Europe was fortunate to have the City of London financial centre in its single market.

Barnier also said he hoped that other areas of the world would follow Europe’s example in regulating bankers’ pay but de-clined to be drawn on whether he wished to extend stricter bonus regime to hedge

funds and private equity firms.These investors are now excluded from

such curbs, though they face curbs on pay later this year under another EU law.

Barnier’s message is unlikely to sat-isfy his critics in Britain. They accuse the Frenchman, who is in charge of writing new EU financial laws, of driving a conti-nental agenda to overhaul finance, shack-ling the City of London.

But the commissioner said he had gone to lengths to accommodate the de-mands of Britain and its Finance Minister George Osborne.

The change in the law is set to be intro-duced as part of a wider body of legislation, known as Basel III, which demands that banks set aside roughly three times more capital and build up cash buffers to cover risk such as unpaid loans.

Britain had argued successfully for ad-ditional flexibility to demand its banks set aside higher capital than that foreseen for the wider European Union.

Additional reporting by Luke Baker; Writing by Paul Taylor

European Commissioner for internal market and services michel Barnier answers reporters’ questions

during an interview with Reuters at the Eu Commission headquarters in Brussels February 28, 2013.

REUTERS/fRancoiS LEnoiR

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deepening social crisis threatens fabric of EuBy LukE BAkER And RoBin Emmott

BRussELs . FEBRuARy 28, 2013

The worst of Europe’s sovereign debt crisis may be over in terms of finan-cial turmoil but the region now faces

a social crisis that has potential to tear the European Union and its single currency project apart.

Political and economic analysts speaking at the Reuters Euro Zone Summit said the decision last September by the European Central Bank to buy government bonds in unlimited amounts set a floor under one part of the crisis, but did nothing to prevent worsening social strife.

Rising popular unrest has been most im-mediately visible in the Italian election re-sults, where voters overwhelmingly rejected the austerity programs supported by outgo-ing Prime Minister Mario Monti and advo-cated by the European Union.

Similar problems are brewing in Spain and Greece, where youth unemployment stands at 50 percent and people are facing a ‘lost generation’ of joblessness and frustra-tion. Portugal, and to an extent Ireland, are in a similar fix. And there have been strikes and demonstrations from Belgium to Cy-prus and France.

“If you look at unemployment in southern

Europe, the situation is clearly not socially sustainable. The outlook for these countries is extremely bleak,” said Zsolt Darvas, a re-search fellow in international economics at Bruegel, a Brussels think-tank that provides input to EU policymaking.

“There’s a very high probability that if the economic situation doesn’t improve in a very strong and visible way, governments will fail and the catastrophe will come, they will leave the euro,” he said.

“They are in a spiral. The question is, when will it stop.”

Greece, where it took two elections last year before a government was formed that backed the austerity program imposed by the EU, is a particular concern. And Italy, which may have to follow Greece in hold-ing a second poll if a government does not emerge, is an increasing threat.

“The major risk is that the political sys-tem breaks down, that’s still a major risk in Greece,” said Darvas.

“If the current government were to fall apart, it would be extremely difficult to keep Greece inside the euro. We see in Spain the social pressure is increasing. In Italy, financial markets will decide what happens, they will wait for what emerges, but something radi-cal may have to be done.”

There is a rising awareness among EU leaders and policymakers about the social dimension of the crisis, but it is only now, more than three years in, that steps are being taken to address the problem.

European labor ministers met in Brus-sels on Thursday to discuss steps needed to improve job training and employment and head off the threat that joblessness could de-stabilize the EU.

They agreed on a “youth guarantee scheme” focused on ensuring that young people under 25 receive either an offer of work, further education or work-related training at least four months after leaving

education or becoming employed.The scheme is part of a 6-billion-euro

initiative to tackle youth unemployment in the worst-hit corners of Europe over the next decade, a plan that will be discussed in more detail at a meeting of EU leaders at a summit in Brussels on March 14-15.

But analysts are concerned the steps are too little, too late to heal unemployment which is set to scar the southern reaches of Europe for a generation to come.

Clemens Fuest, a research director in public finance at Oxford University and the incoming chief of Germany’s ZEW economic institute, said he saw the social dimensions of the crisis worsening rapidly, especially in Spain and Greece.

“I absolutely think it can get a lot worse. That is really the current plausible scenario for a break-up of the currency union,” he told the Reuters summit on Wednesday. “It may very well be that in these countries at some point the population will say ‘we don’t believe that things will get better’.”

The choice at that point would either be for the euro zone to attempt a large-scale program of redistribution to the south, which Fuest said he did not expect, “or the decision to leave the currency union, devalue and try another way”.

“I think the degree of desperation has to be high for people to take that risk. But if things continue, if unemployment goes up to 30 percent or something in Spain, there certainly is the danger that might happen.”

Additional reporting by Paul Taylor in Brussels and Paul Carrel in Frankfurt, editing by Mike Peacock

A picture illustration taken with the multiple

exposure function of the camera shows a one

Euro coin and a map of Europe, January 9, 2013.

REUTERS/Kai PfaffEnbach

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FOR MORE INFORMATION:Michael Peacockmichael.Peacock@thomsonreuters.comLuke BakerLuke.Baker@thomsonreuters.comPaul TaylorPaul.taylor@thomsonreuters.comMichael Stottmichael.stott@thomsonreuters.comBenjamin BeavanBenjamin.Beavan@thomsonreuters.comNina Andrikiannina.Andrikian@thomsonreuters.com

Benoit Coeure

Executive Board member

ECB

Guy Verhofstadt

Leader of centrist ALdE group

European Parliament

Jose Barroso

President

European Commission

Luis De Guindos

Finance minister

spanish Government

Peter Mandelson

Former European Commissioner

and ex-Business secretary

British Government

Zsolt Darvas

Research Fellow

Bruegel

Clemens Fuest

Economist

oxford university

Joaquin Almunia

Vice-President

European Commision

Karel De Gucht

trade Commissioner

European Commission

Michel Barnier

Commissioner for

internal market/services

European Commission

Pierre Moscovici

Finance minister

French Government

Jorg Asmussen

Executive Board member

ECB

Kenneth Clarke

minister and member of Parliament

British Government

Wolfgang Schauble

Finance minister

German Government

summit speakers