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Merkel calls for calm as Obama urges action on euro

German Chancellor Angela Merkel tried on Tuesday to reassure volatile markets that the eurozone will stay intact after US President Barack Obama urged greater efforts to solve the EU debt crisis.

But the euro dropped against the dollar and European stock markets fell as concerns over Greece outweighed news that Italy was in talks with China about buying bonds in a bid to bring down Rome’s soaring interest rates.

In an interview with Germany’s RBB radio station, Merkel said the top priority for policymakers was to avoid an “uncontrolled insolvency” for Greece, as this would have serious consequences for the rest of the 17-nation zone.

She also stressed that the eurozone had to remain intact, warning that if Greece were to leave the group, others would swiftly follow.

“I have made my position very clear that everything must be done to keep the eurozone together politically. Because we would soon have a domino effect,” said the chancellor.

Merkel’s comments followed a stern warning from Obama that the global economy was unlikely to recover until the eurozone debt crisis was contained.

In a roundtable interview with Hispanic journalists, Obama said: “We will continue to see weaknesses in the world economy, I think, so long as this issue is not resolved.”

The US president added that it would be a “significant topic” for the next G20 meeting in France and that while Washington was “deeply engaged” with EU countries on tackling the crisis, ultimately it was up to Europe to solve it.

Greece is obviously the biggest immediate problem. And they’re taking some steps to slow the crisis but not solve the crisis,” Obama said.

“The bigger problem is what happens in Spain and Italy if the markets keep making a run at those very big countries,” he said.

Following Monday’s sharp market drops, partly on the back of comments by her vice chancellor that Europe should not rule out an “orderly default” for Greece, Merkel urged against careless talk in such a volatile environment.

In a clear swipe at her deputy, Economy Minister Philipp Roesler, Merkel said: “Everyone should weigh their words very carefully. What we do not need is volatility on the financial markets. The uncertainties are already big enough.”

Thorsten Polleit, an analyst at Barclays Capital, said Merkel was trying to forge a coherent German position after a cacophony of voices from Europe‘s top economy confused and panicked the markets on Monday.

“This declaration from Mrs Merkel should be understood as a clarification after divergent comments from her coalition,” he said.

As if to confirm Obama‘s concerns about Italy, interest rates on Italian bonds spiked to a new high of 5.6 percent on Tuesday, following a placement of 3.865 billion euros (5.256 billion dollars) in five-year bonds.

Italian Finance Minister Giulio Tremonti met the head of China’s biggest sovereign wealth fund CIC last week, a finance ministry spokesman told AFP before the auction, as Rome seeks buyers of its bonds to reduce interest rates.

Many analysts are concerned that Italy could be the next eurozone domino to fall, with an enormous debt which stands at 120 percent of gross domestic product.

Battling to prevent a debt crisis that has already claimed Greece, Portugal and Ireland as victims, Silvio Berlusconi’s government hopes the Chamber of Deputies will on Wednesday pass an austerity package to balance the books by 2013.

Meanwhile in Greece, authorities were bracing for a new round of strikes to protest against new civil service pay and job cuts, as well as an unexpected fresh property tax translating into hundreds of euros on average.

EU officials have warned repeatedly that Athens will not receive the next slice of aid, worth eight billion euros, unless it can persuade an international team of observers that it can swiftly reduce its deficit pile.

Reform laws voted months ago have yet to be put into practice, and a crash privatisation programme has made little tangible progress, raising fears Athens will soon simply run out of money.

On Monday, deputy finance minister Filippos Sachinides said the government had enough cash to last until October.

Merkel combined a carrot-and-stick approach, saying she was making it clear to Athens “in direct contacts” with Greek authorities “how serious the situation was” but adding also that Athens was making some progress.

“Everything I hear from Greece is that the Greek government has hopefully seen the writing on the wall and is now doing some of the things that are required,” she said.

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