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Italy's Monti warns Europe of 'psychological break-up'

image captionMr Monti's government faces the risk of being cut off from borrowing by the financial markets

Italy's Prime Minister Mario Monti has warned of a "psychological break-up" of Europe that must be contained.

In an interview with Germany's der Spiegel magazine on Sunday, he said the eurozone crisis was creating national resentments that could damage the EU.

Separately, the head of Italy's central bank, Ignazio Visco, insisted his country did not yet need a bailout.

Meanwhile, negotiations between Greece and its rescue lenders made "good progress" and will resume in September.

Inspectors from the troika of the European Commission, European Central Bank (ECB) and International Monetary Fund (IMF) left Athens on Sunday following several days of talks with Greece's new coalition government.

The Greek government desperately needs the next tranche of bailout money to be released in order to meet debt payments and to pay its bills, but will have to wait another month for a decision.

"Talks went well, we made good progress," said the IMF's chief negotiator, Poul Thomsen. "We will take a break and come back in early September."

'Front line'

The Greeks have offered a further 11.5bn euros (£9.12bn; $14.25bn) of austerity measures in order to win over the inspectors.

However, the tough conditions imposed by Greece's lenders - including spending cuts, tax rises and labour market reforms - have met with popular anger in Greece, with the public's ire particularly focused on Germany.

The issue was taken up by Mr Monti in his interview, which was published on the German language site of der Spiegel.

"There is a front line in this area between north and south. There are reciprocal prejudices," he said. "It is very alarming and we must fight against it."

In Greece, Germany's Chancellor Angela Merkel has often been caricatured as a Hitler figure in protests and in the media.

This week an Italian newspaper is set to run a front-page article describing Ms Merkel's domination of the European political scene as a "Fourth Reich", according to the Associated Press news agency.

Mr Monti warned that a disintegration of the eurozone would "destroy the founding of the European project".

"Therefore it is the prime task of the nations' leaders to explain to their citizens Europe's real situation, and not give in to prejudices."

Meanwhile, Bank of Italy governor Ignazio Visco has told the Italian daily Repubblica that his country does not yet need to turn to the eurozone's two bailout funds for financial assistance, but did not rule it out in the future.

"Looking ahead, it will depend on several factors," he said. "If the markets convince themselves a turning point has passed, if Italy does not abandon fiscal discipline and steps up its efforts to promote growth, then there will be no need for a rescue fund intervention. Much depends on ourselves."

Italy's government has the biggest debt burden of any of the major eurozone countries, which makes it particularly susceptible to a loss of market confidence - something that would make it impossible for the government to reborrow its debts as they come due for payment.

Speculation is currently focused on Spain, which has already secured a 100bn-euro rescue deal for its banks.

It is feared that if Spain's government is cut off by the markets and has to seek a full-blown bailout, Italy may follow not far behind - an eventuality that would exhaust the eurozone's current bailout capacity.