Even 'small crisis' enough to tear EU apart, Moody's warns

The rating agency praised the "significant political progress" made since the crisis in putting the foundations in place for a banking union and creating a eurozone rescue fund.

However, it said endless austerity demands in return for bail-outs had fuelled deep resentment across the region, especially in countries weighed down by sky-high unemployment.

"Significant vulnerabilities" facing the bloc such as a British exit from the EU also remained, which would fuel support for "anti-establishment and anti-EU parties elsewhere", it warned in a report.

Colin Ellis, Moody's chief credit officer for Europe, said a British exit could spark an "existential moment" for the bloc.

"Even if the EU survives its current challenges largely unscathed, even a 'small' future crisis could threaten the sustainability of current institutional frameworks, if it coincided with negative public sentiment and populist political developments," the report said.

"This can create the impression that the question is when the system breaks, rather than if."

Tough choices

It came as Mervyn King, the former governor of the Bank of England, warned that the eurozone faced four “unpalatable choices” as policymakers struggle to lift the bloc out of its economic malaise.

Lord King said the single currency area would have to choose between an economic "depression" in the south, higher inflation in northern states like Germany, permanent fiscal transfers or a "change of composition of the euro area".

However, he told an audience in Frankfurt that there was "a limit to the economic pain that can be imposed in pursuit of a federal Europe without risking a political reaction.

"There are no empires in Europe any more and our leaders would do well not to try to recreate one."

The economics professor added that the global economy would be in "deep trouble" if interest rates remained at their record lows for a long period of time as he called for urgent action to boost productivity and trade.

"A Keynesian stimulus can only buy time," he said.

"I'm not saying central banks should raise rates and say: 'to hell with it', but central bankers should deliver speech after speech to say 'we can do no more'".

Separately, Adam Posen, a former Bank of England policymaker, urged Mark Carney, the current governor, to speak out against the “delusional fantasy” that Britain could thrive outside the EU.

“On any reasonable economic criteria, Brexit is a loser,” he told Bloomberg.

Slow progress?

Moody's said the eurozone debt crisis had made policymakers more reluctant to cede sovereignty, while "significant fiscal union" was "off the table".

"The process of further integration seemingly relies on further shocks almost by design," it said.

Brussels' flagship growth plan also faced significant difficulties as countries with room to invest refused to increase public spending, while fear of further bail-outs meant the banking union remained incomplete, it added.

Moody's said the Greek crisis also remained a big threat to the eurozone and EU.

"The risk of “accidents” remains high in a process that suffers from partial solutions and, increasingly, public scepticism," it said.

"Crises can be great catalysts for change, and this has been the case in the euro area.

"Still, significant vulnerabilities remain - with 'Brexit' and 'Grexit' still key risks. In a period of relative financial calm, the political will to further pool sovereignty evaporates quickly, and it is only against the alternative of a break-up of the existing system that further measures come back into consideration."