REUTERS SUMMIT-Complacency will revive euro zone crisis-EU lawmaker

Tue Feb 26, 2013 7:48am EST

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(For other news from Reuters Euro Zone Summit, click here)

* Verhofstadt says euro zone's main problems remain unresolved

* Italy may act as a weak-up call

* Former Belgian PM says no choice but to deepen integration

By Robin Emmott and Luke Baker

BRUSSELS, Feb 26 (Reuters) - Italy's fractured election result may be a wake-up call to European politicians who have slackened their reforms and in any case market pressure will return to force euro zone integration, a prominent EU lawmaker said.

The Italian stock market fell and the country's borrowing costs rose on Tuesday as investors took fright at a political stalemate after elections that saw a protest party lead the poll and left no group with a clear majority in parliament.

"Maybe the elections in Italy can be a wake-up call for the European leaders," said Guy Verhofstadt, a former Belgian prime minister and leader of the Liberals in the European Parliament, warning of a return to crisis if leaders do not act.

"You can't say the crisis is over, because the main problem is still there," Verhofstadt told the Reuters Euro Zone summit, referring to Europe's indebted banks, fading business dynamism and the incomplete rules underpinning the euro zone.

Promising to do whatever it takes to save the euro zone last year, European Central Bank President Mario Draghi brought down countries' unsustainable borrowing costs that were threatening to break up the 17-nation bloc as the debt crisis spread from Greece to the bigger economies of Italy and Spain.

Since then, the pressure for action has receded across European capitals, even as the euro zone slides back into recession in 2013, as bond yields fall across the bloc that generates almost a fifth of global economic output.

Facing popular protests at government spending cuts, politicians are shying away from tougher issues such as dealing with insolvent banks, challenging the special interests of unions and deepening integration to cement the euro zone.

"The pressure will come back in the next two to three years and markets will put pressure on the system again to build a genuine fiscal, economic and monetary union," Verhofstadt, a former Belgian prime minister, said.

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TIME TO CHOOSE

Germany is reluctant to push ahead with the next steps because it fears it will be forced to cover the cost of reckless lending by banks in countries such as Spain.

Few EU officials expect much progress until after elections in Germany, the euro zone's biggest economy, in September when German Chancellor Angela Merkel aims to win another term.

Still, Verhofstadt, one of the most high-profile members of the European Parliament and a well-known European federalist, said investors want to be reassured that the euro is a lasting project with the necessary rules to make it work.

The ECB's bond-buying pledge did not solve the underlying problems, he said.

"I see this (market) pressure will not disappear, I hope it will not disappear so that the leaders in Europe are obliged to do the job from which they are trying to escape now," he said.

EU politicians argue they have already enacted unprecedented reforms to complete the euro project, which was launched in 1999 with a central bank but without common budgetary and fiscal rules to underpin it.

Two of those were to agreed last year a special treaty to keep budgets in balance or surplus and cut debt, and the launch of a permanent euro zone bailout fund, the 500 billion euro ($660 billion) European Stability Mechanism (ESM).

Verhofstadt said because those agreements were between governments, not the EU's technocrat institutions, decisions on bailout funds and sanctions for rule-breakers were too dependent on national parliamentary approval and electoral cycles.

"The crisis shows it isn't possible to solve all our problems with little steps," he said. "You need to make a choice and decide whether you want integration. With a shared currency you have no other choice." (Reporting by Robin Emmott, Luke Baker, Paul Taylor, Mike Peacock)

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