Merkel: Countries will not be kicked out of eurozone

The German leader’s comments were made privately to her parliamentary colleagues, according to Berlin-based reports. Merkel described the situation in Greece and Italy as “fragile,” according to the Irish Times.

“I’m not even considering the possibility because I think we would start a domino effect that would be extremely dangerous for our currency system,” the paper quotes her as saying.

Instead, the path out of the crisis is austerity and deeper fiscal integration of eurozone states, she said, according to officials.

Heading into a meeting with the chancellor Monday evening, EU Council President Herman Van Rompuy echoed Merkel’s comments, saying that the political screws should be tightened still further on Greece and Italy.

“Financial markets see that there are still problems in the execution of plans in Greece and Italy,” he said. “Europe must increase pressure on those countries in order for them to implement the plans they put together.”

He also said that kicking Greece out of the eurozone would “cause more problems than solutions”.

Separately, the German finance minister, Wolfgang Schäuble, and the head of the European Central Bank, Jean-Claude Trichet, set out their visions for the future of the single currency area, with the former attacking arguments that the problem with the European economy is a lack of demand and declared that “austerity is the only cure for the eurozone.”

Writing an opinion piece in the Financial Times, he criticised calls “on the US and Germany to use their supposed ‘fiscal space’ to encourage demand and on European Union leaders to take an immediate leap into a fiscal union and joint liability.

“Piling on more debt now will stunt rather than stimulate growth in the long run,” he wrote

Schaeuble argued that the solution in all western countries is to trim down their public sectors, even if voters are opposed.

“The recipe is as simple as it is hard to implement in practice: western democracies and other countries faced with high levels of debt and deficits need to cut expenditures, increase revenues and remove the structural hindrances in their economies, however politically painful.”

“ There is some concern that fiscal consolidation, a smaller public sector and more flexible labour markets could undermine demand in these countries in the short term. I am not convinced that this is a foregone conclusion,” he added.

He also argued against immediate fiscal union as it would remove the incentive for governments to make structural changes, but instead for more gradual fiscal centralisation that may require “profound treaty changes.”

Outgoing ECB chief Trichet for his part, argued in Paris on Monday for a European “federal government with a federal finance minister."

His successor, Italian central bank head Mario Draghi, called on eurozone state to take a quantum leap towards integration, adding that a key problem with the single currency is a lack of co-ordinated tax policies.

The various visions of the future of European integration came against a background of tumbling shares and soaring peripheral bond yields.

European stocks slid four percent on Monday, with financial shares hit particularly badly.

Josef Ackermann, the CEO of Deutsche Bank told a banking conference in Frankfurt the same day that European banks would not be able to handle write-downs of government bonds.

“It is obvious, not to say a truism, that many European banks would not cope with writing down the government bonds held in the banking book to market value,” he said.

Asian shares on Tuesday tumbled. S&P 500 futures in Asia were off 2.7 percent while Greek one-year bond yields climbed to a record 82.1 percent and Italy’s ten-year bonds leapt to 5.56 per cent.

Elsewhere, Slovak finance minister Ivan Miklos told the Financial Times that delaying the vote on extending the powers of the eurozone's bail-out fund would be "counterproductive". His comments came after parliamentary speaker and head of the junior coalition party Richard Sulik said the vote would not be held before December. Sulik's party's support is needed to pass the vote.