Merkel and Sarkozy 'now planning two-tier Europe'
Rome's rising debt yields cast doubt on euro future
THE clearest signs to date of deep splits across the EU emerged last night after reports that Germany and France are planning for a two-speed Europe.
The reports followed another turbulent day when Italy was savaged in the markets and Greece was left effectively leaderless.
The intensifying pace of the debt crisis is creating new dangers for all economies.
And there would be fears our economy would be at risk of being left behind if the secret plans for "core" euro countries to cut themselves away from weaker economies are correct.
The Reuters news agency, which broke the news of the Irish bailout, said officials in Paris, Berlin and Brussels were drawing up plans for a radical overhaul of the EU, including a two-speed Europe that would involve establishing a more integrated and potentially smaller eurozone.
A spokesman for the Government refused to comment last night, but officials are monitoring the crisis as it unfolds.
Details of the Franco-German plan emerged as Italy was on the verge of accepting its own form of bailout deal.
Borrowing costs for the Italian government hit a record high yesterday, even after Prime Minister Silvio Berlusconi was being forced from office.
The chaos in Italy threatens to undermine the entire euro project.
French President Nicolas Sarkozy told a meeting in Strasbourg on Tuesday that a two-speed Europe was the only model for the future.
The discussions among senior policymakers in Paris, Berlin and Brussels go further, raising the possibility of one or more countries leaving the eurozone, while the remaining core pushes on toward deeper economic integration, including on tax and fiscal policy.
A senior EU official said changing the make-up of the eurozone has been discussed on an "intellectual" level but had not moved to operational or technical discussions, while a French government source said there was no such project in the works.
A senior German official called it "pruning the eurozone" to make it stronger.
"You'll still call it the euro, but it will be fewer countries," he said, without identifying those that would have to drop out.
It comes after it emerged last week that France and Germany were prepared to see Greece pushed out of the euro, breaking the previous taboo about the subject. Ireland will have to guard against having any new deal foisted on this country or, worse, being identified with other deadwood countries to be cut.
Italy is now the first major economy to be swept up by the debt crisis after borrowing costs reached "totally unsustainable levels" yesterday.
The interest rates Italy's government will have to pay to borrow on international bond markets hit 7pc.
It is seen as the point of no return after Greece, Ireland and Portugal were all forced to take bailouts weeks after debt costs hit the 7pc mark. Italy's debts are three times bigger than the three bailout countries combined.
A crisis there now threatens the whole shape, even the future, of the euro.
Debt costs soared even after Mr Berlusconi had pledged to resign.
The ECB is charged with maintaining financial order in Europe but it refused to buy enough bonds to whip Italian funding costs back into line. The Frankfurt-based bank has the cash to turn the markets around but is reluctant to support Italy as long as governments there run shy of financial reform.
A team from the European Commission arrived in Italy yesterday -- less than a year after officials on a similar mission first flew to Dublin.
The Italian turmoil has dramatically increased the risk of a "double-dip" recession.
Economists now fear the crisis will stifle the demand in international markets that Ireland is depending on for an export-led recovery.