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Germany, Italy vow to protect the eurozone from crisis

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German Chancellor Angela Merkel and Italian Prime Minister Mario Monti have pledged to do everything necessary to shield the debt-wracked eurozone from the crisis.

In a telephone talk on Saturday, they “agreed that Germany and Italy will do everything to protect the eurozone”, said a statement released in Berlin and Rome.

The statement followed a similar pledge by the leaders of France and Germany on Friday and remarks on Thursday by the head of the European Central Bank, Mario Draghi, in which he vowed to “do whatever it takes to preserve the euro”.

The public pledges of support by eurozone leaders have spawned speculation in financial markets that they are readying co-ordinated action to bring down the borrowing costs of Italy and Spain, currently seen as unsustainable.

All eyes are on the monthly meeting of the European Central Bank on Thursday to see whether the bank will resume its disputed program of buying the bonds of struggling eurozone nations.

Writing in a weekly research note published before the joint statement, Unicredit global chief economist Erik Nielsen said: “The European top policymakers will do what it takes to make the eurozone work.”

He cautioned the markets against taking on the ECB, which has unlimited resources to buy bonds to drive down borrowing costs.

“The message was delivered loud and clear. If the market doesn’t believe it, the big guns will come out,” said the economist.

Draghi’s surprisingly strong verbal intervention in London on Thursday had an immediate effect.

Spanish borrowing costs had been at their highest since the euro was founded – more than 7.6 per cent – before Draghi spoke, but shot down to well below the seven per cent mark that forced Ireland, Greece and Portugal to seek bailouts.

Italian borrowing costs also spiked sharply downwards, to below six per cent, while the euro also rallied strongly on the foreign exchange markets.

Financial markets will test the firm pledges to stand by the euro on Monday, when Italy bids to raise up to 4.75 billion euros ($A5.65 billion) in five and 10-year bonds.