Chancellor Angela Merkel warned that Germany alone cannot solve the eurozone crisis as Spain?s borrowing costs surged to a record high level on Thursday after a Moody?s downgrade.
With ?all eyes? set to focus on Germany at a key G20 summit in a few days? time, Merkel sought to play down expectations that Europe?s top economy and effective paymaster could conjure up all the answers.
?Germany is strong, Germany is an engine of economic growth and a stability anchor in Europe,? she said.
?But Germany?s powers are not unlimited,? Merkel warned in a speech to German lawmakers outlining Berlin?s position ahead of the June 18-19 meeting of G20 leaders in Los Cabos, Mexico.
Four days before Greek re-run elections with the prospect that a victory by anti-austerity parties could send Athens back to the drachma and with Spain facing record high borrowing costs despite a bank bailout, pressure is mounting for new action to plug the two-year-long debt crisis.
New French President Francois Hollande was set for talks with reformist Italian Prime Minister Mario Monti in Rome later on Thursday to discuss initiatives such as a French-led push for a growth strategy, which has been overshadowed by calls for a big leap towards further EU integration.
Merkel said that the European crisis, also being viewed nervously by the United States, would dominate the talks in Mexico but cautioned against taking the easy way out with solutions based on ?mediocrity?.
She stressed Europe would only find a way out of the crisis with a strong ?political union? with greater fiscal coordination and oversight.
?Financing growth with new borrowing must stop,? she said.
On Wednesday, European Commission President Jose Manuel Barroso also said the solution to the debt crisis lay in urgent progress towards ever greater integration, warning the EU was in a ?social emergency?.
Amid rising anger as living standards drop in countries applying austerity measures, Greece, which holds critical polls on Sunday, is running out of cash for salaries and pensions.
Labour Minister Antonis Roupakiotis said that Greece should have enough cash to pay pensions at least for July after the Kathimerini daily said the state only had enough money to pay salaries and pensions until July 20.
Unemployment figures handed further bad news to Greece on Thursday showing the jobless rate jumped to 22.6 percent in the first quarter.
Greece has already been forced to seek international help twice, first for 110 billion euros in May 2010 and then for 130 billion euros earlier this year plus a 107-billion-euro private debt write-off.
The election, called after a May 6 poll failed to produce a government, is being watched nervously by politicians and markets amid concerns that the leftist Syriza party, which wants to tear up the bailout deals, will triumph in the vote. Such an outcome could cause Greece to leave the eurozone, but the Spanish stock market rose sharply on Thursday, apparently reflecting an upsurge of confidence.
Meanwhile Spain?s borrowing costs shattered euro-era records after Moody?s downgraded its debt close to junk-bond status and warned of a growing risk of a full-blown sovereign bailout.
Spain, the eurozone?s fourth-biggest economy, was forced last week to accept a bank bailout of up to 100 billion euros ($126 billion) but even that has failed to impress the bond markets.
The rescue was interpreted as adding to the Spanish debt problem and pushing Spain closer to a national rescue.
An audit of Spanish banks will show they need up to 65 billion euros of fresh capital, the ABC daily said, citing a draft report by auditors Oliver Wyman and Roland Berger.
European shares fell in morning deals after Asian markets closed mostly lower.
In morning trading, London?s FTSE 100 index of leading companies fell 0.75 percent to 5,442.97 points, Frankfurt?s DAX 30 dropped 0.78 percent to 6,104.48 points and in Paris the CAC 40 lost 0.89 percent to 3,002.94.
Italy was also punished by the bond market Thursday as it struggled to convince investors it will not need a bailout.
The bond sale came just hours before French President Francois Hollande was due to meet Italian Prime Minister Mario Monti for talks set to focus on growth and debt management.
The meeting is also set to pave the way for a summit between Italy, France, Germany and Spain on June 22, and a crucial EU leaders meeting in Brussels on June 28-29. [AFP]