Europe warned yesterday that its debt crisis was dragging the region towards a new recession as Greece chose a new Prime Minister to try and pull it back from the financial abyss.

Lucas Papademos, whose first task as Premier will be to ratify a crucial EU bailout deal, acknowledged Greece faced “huge problems” but said its membership of the euro single currency was a guarantee for monetary stability.

But in Italy, the latest flashpoint in the eurozone crisis, there was still confusion over who would take the reins of power after outgoing Prime Minister Silvio Berlusconi manages to steer a package of reforms through Parliament.

Meanwhile, Angela Merkel, the leader of the continent’s economic powerhouse, said Germany aims to preserve the eurozone in its current form, dismissing reports that Berlin was preparing for a smaller currency union.

The extent of the crisis facing the region was laid bare in the latest forecast from the European Commission which the EU’s new economy tsar said amounted to a “last wake-up call”.

Olli Rehn said the EU faced tipping back into recession in 2012 due to a “vicious circle” of government debt, vulnerable banks and collapsed spending.

“Growth has stalled in Europe, and there is a risk of a new recession,” Economic Affairs Comm-issioner Mr Rehn said as the EU released detailed forecasts for the eurozone and broader economy for the next two years.

Growth across the eurozone in 2012 would collapse to 0.5 per cent, said the forecast, a steep drop from its previous prediction of 1.8 per cent.

The economy in Italy, the eurozone’s third largest economy, would virtually stagnate in 2012 with growth of just 0.1 per cent, according to the forecast.

Italy’s crisis has already prompted Mr Berlusconi to announce he will quit after approval this weekend of a package of reforms aimed at calming investor fears, which have pushed borrowing rates to alarming levels above seven per cent.

Mr Rehn, who has despatched officials to Rome to pore over the government’s books, warned that spiralling lending rates “would have a significant impact on financing conditions and thus also growth of the real economy”.

In Rome, a former EU official who made his name in titanic anti-trust tussles with US corporate giants like Microsoft appeared front-runner to lead a national unity government.

Mario Monti’s appointment was not a done deal however after several leading members of Mr Berlusconi’s centre-right coalition insisted on early elections.

Spread between German, French bonds hits new record

The spread between German and French 10-year government bond rates touched a historic high of 170 basis points yesterday amid fears the eurozone debt crisis is spreading fast.

The wide gap in the cost of borrowing between the single currency bloc’s two biggest eco­nomies reflects worries that France may join Italy and Greece in struggling to fund its debt while German bonds are highly sought after as a safer bet for nervous investors.

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