Euro Area Is Running Significant Risk of Breakup: Rehn

The 17-nation euro area is in real danger of disintegrating unless policy makers revamp the bloc’s fiscal and economic ties, Economic and Monetary Commissioner Olli Rehn said.

“The way things are going and under the current structures, the euro area has a significant risk of breaking up,” Rehn said in a speech at a European Commission event in Helsinki. “We’re either headed for a deterioration of the euro area or a gradual strengthening of the European Union.”

A divergence in the sovereign yields of euro countries shows bets against the integrity of the 17-member currency bloc are growing. German two-year yields fell below zero for the first time this week while the yield on similar-maturity Spanish notes rose 11.8 basis points to 5.11 percent today.

A yield below zero means investors will receive less in repayments through maturity than the amount they paid to buy the debt.

Spain’s 10-year yield exceeded 6.5 percent for a third day, approaching levels at which Greece, Ireland and Portugal sought bailouts after being shut out from market funding. The euro has dropped 7.3 percent against the dollar over the past two months, nearing a two-year low this week, as investors grow more concerned Europe’s currency area will fracture.

The monetary union “has extremely tough decisions ahead and it’s important to face the truth,” Rehn said. “We must continue measures to balance public finances at the same time as we need structural reforms and actions that boost growth.”

Unpopular Measures

Austerity measures are proving unpopular and choking growth in countries working to reduce deficits, including Greece, Spain and Portugal. The monetary union’s economy will shrink 0.3 percent this year before returning to 1 percent growth in 2013, the European Commission said last month.

Euro-area unemployment reached 11 percent in April and March, the highest on record, the European Union’s statistics office in Luxembourg said today. Spain, whose government is struggling to contain a banking crisis, had the bloc’s highest unemployment rate at 24.3 percent, up from 24.1 percent in March, today’s report showed.

European Central Bank President Mario Draghi said yesterday that the euro is “unsustainable unless further steps are being undertaken.”

June Summit

EU leaders will next consider how to manage the currency zone and assess the situation in Greece at a Brussels summit starting on June 28. Greek voters return to the polls on June 17 after the May 6 election left the country without a government.

Of the euro area’s members, Finland, Germany, Luxembourg and the Netherlands have the AAA credit rating. The other countries in the monetary union are Austria, Belgium, Cyprus, Estonia, France, Greece, Ireland, Italy, Malta, Portugal, Slovakia, Slovenia and Spain.

Spain’s actions on balancing its public finances have been “significant” and the country may get a one-year extension on bringing its budget deficit in line with the EU’s 3 percent of gross domestic product rule, Rehn said today, reiterating comments he made yesterday.

“If Spain is able to fix the finances of its autonomous areas, we’re ready to propose a one-year extension” of the deadline for correcting the excessive deficit, he said.

To contact the reporter on this story: Kasper Viita in Helsinki at kviita1@bloomberg.net

To contact the editor responsible for this story: Christian Wienberg at cwienberg@bloomberg.net

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