Italian borrowing costs reached breaking point Wednesday after Prime Minister Silvio Berlusconi's insistence on elections instead of an interim government opened the way to prolonged instability and delays to long-promised economic reforms. In a dramatic escalation of the euro zone debt crisis, Italian 10-year bond yields shot above the 7 percent level that is widely deemed unsustainable, reflecting an evaporation of investor confidence and prompting German Chancellor Angela Merkel to issue a call to arms. Merkel said Europe's plight was now so “unpleasant” that deep structural reforms were needed quickly, warning the rest of the world would not wait. “That will mean more Europe, not less Europe,” she told a conference in Berlin. She called for changes in EU treaties after French President Nicolas Sarkozy advocated a two-speed Europe in which euro zone countries accelerate and deepen integration while an expanding group outside the currency bloc stayed more loosely connected - a signal that some members may have to quit the euro if the entire structure is not to crumble. “It is time for a breakthrough to a new Europe,” Merkel said. “A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can't survive.” The European Central Bank, the only effective bulwark against market attacks, wasted no time intervening to buy Italian bonds in large amounts but remains reluctant to go further. “The ECB is buying aggressively,” one trader said. Italy has replaced Greece at the centre of the euro zone debt crisis and is on the cusp of requiring a bailout that Europe cannot afford to give. Unlike Greece, an Italian default would threaten the entire euro project. Having lost his majority in a key parliamentary vote, Berlusconi confirmed he would resign after implementing economic reforms demanded by the European Union, and said Italy must then hold an election in which he would not stand. European shares fell. In London, the FTSE-100 index of top companies closed down 1.92 percent at 5,460.38 points. In Paris, the CAC-40 lost 2.17 percent to 3,075.16 points and in Frankfurt the DAX 30 dropped 2.21 percent to 5,829.54 points. Milan led the losers, falling 3.78 percent after being down more than 4.0 percent at one stage. Madrid, also seen as a possible eurozone debt crisis victim, was down 2.09 percent. US stocks slid more than 2 percent as a spike in Italian bond yields heightened fears the debt crisis in Europe was spreading. The Dow Jones industrial average was down 252.67 points, or 2.08 percent, at 11,917.51. The Standard & Poor's 500 Index was down 29.89 points, or 2.34 percent, at 1,246.03. The Nasdaq Composite Index was down 66.82 points, or 2.45 percent, at 2,660.67. The euro slid 1.7 percent versus the greenback and the yen and 0.5 percent against the Swiss franc.
