Life after the Eurozone planned for peripheral states facing possible exit

Julian Harris
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GERMAN and French officials have discussed the formation of a more tightly integrated core Eurozone, while separate reports from Germany reveal that Angela Merkel’s party is investigating ways of some countries leaving the single currency while staying in the European Union.

Merkel’s Christian Democratic Union will publish a paper today on how Eurozone members might accomplish an orderly withdrawal, according to the German newspaper Handelsblatt.

And yesterday French President Nicolas Sarkozy said a “two speed” Europe was a model for the future. Separately, a senior EU official told Reuters that changing the make-up of the Eurozone has been discussed on an “intellectual” level.

Meanwhile, nervous investors turned their attention to France, as the spread between its bonds and German bunds hit a worrying record high of 147 basis points (bps).

The spread signals the degree to which German state debt is seen as safer than that of French debt.

The gap is partly due to German debt’s status as a safe haven, as other Eurozone governments wobble. Yet the Bank for International Settlements has reported the French banking sector’s exposure to Italian, Spanish and Greek debt at over €600bn (£511bn).

“The contagion to core countries is already visible in France,” said Aegon Asset Management’s Gerard Moerman.