During the last three months, the situation in the euro-area continued to deteriorate further

In the first week of May, a majority of Greeks voted in a general election for parties that reject the country’s bailout agreement with the EU and International Monetary Fund. However, a few days later, Greece announced that new elections would take place after attempts to form a coalition government had failed. The new election gave new hope that Greece will stick to the austerity measures; however major doubts remain on the willingness and ability of Greek citizens to continue carrying the huge burdens which were imposed on them.

Things then took a sharp turn, going from bad to worse. In the last week of May, Spain’s fourth largest bank announced it has asked the government for a bailout worth €19bn. This announcement triggered a series of emergency talks between Spain’s Economy Minister and the European Union, after which it was made public that Spain will request up to €100bn in loans from eurozone funds to try to help shore up its banks.

Recent developments in Italy seem to be mirroring those in the Iberian Peninsula. Almost a year ago, after the appointment of Mario Monti as Italian Prime Minister and his austerity package which aimed to save €59.8 billion from a mixture of spending cuts and tax rises – mainly made up in cuts in the pension system and social benefits – the fiscal balance is nowhere near the projected targets as the expected results failed to materialise. Latest statistical figures showed that the Italian economy continues to shrink, even faster than was expected. The forecast for 2012 has been revised downwards and the same Monti admitted that its deficit will be higher than planned over the next two years.

In view of this, Monti decided to play hardball with the eurozone paymasters in a way unthinkable a few months ago. He tried to pressure German Chancellor Angela Merkel into agreeing to a European shield against high borrowing costs. More pointedly, he told the German magazine Der Spiegel that Italy wanted moral support, not money, from Germany, noting Rome had not received one euro from Berlin, contrary to German perceptions. He also said Germany was the biggest beneficiary of the euro, enjoying low interest rates while Italy’s soared. For a while, this tactic risked provoking a backlash in Germany. As a result, Monti was forced to change tone. This change of attitude was also driven by increasing Italian exasperation with repeated delays in formulating an effective response to a crisis on bond markets that has put Spain and Italy in the front line against an existential threat to the euro.

The image of Monti as unchallenged spokesman for southern Europe reflects deep and volatile anger inside Italy. This manifestation is partly reflective of the domestic pressure faced by Monti, where his popularity among his fellow countrymen slumped drastically in the last months, mainly on the back of anger that there has been no reward for debt-cutting sacrifices.

Judging from contributions in leading international media, there seems to be a consensus that the economic downturn in Spain and Italy is making the fragile situation of the banks even more precarious. Many observers seem to agree that growing uncertainty about the future of monetary union is undermining the confidence of investors, who are increasingly reluctant to buy bonds issued by the problem countries. This, in turn, is creating a sort of self-reinforcing destabilisation. For many, the fact that the attempts to deal with the crisis over the years have been characterised by piece-meal measures only served to highlight the lack of political unity.

In all this uncertainty, one thing seems certain: that the deepening of the crisis makes it clear that the solutions tried so far have all been found wanting. The big fear among European policy makers is that the monetary union in its present form cannot survive much longer without a fundamental change of strategy.

In all this mist, one line of thought looks like consolidating. In certain European quarters, both political and academic, it appears that the only long-term solution is a deeper European unification. From a purely local perspective, such a development will present huge challenges for the medium-long term perspective. In the near future we can afford to look the other way round to try to ignore what is happening in the European corridors of power. But this illusion of security is not sustainable and it is in our interest to follow closely what is taking place there.

Dr Anton Refalo is Labour spokesman for Gozo