Markets Rebound But Eurozone Risks Remain

As the eurozone debt crisis sparked continued nervousness in the financial markets, one of the world's most respected economist has told Sky News that stability will not be achieved unless the euro currency bloc is broken up.

Europe's major market indicators showed modest gains on Tuesday after political uncertainty and fears of debt contagion led to sharp losses in the previous day's session.

London's benchmark FTSE 100 index, Frankfurt's DAX 30 and Paris' CAC 40 all rebounded slightly.

Madrid IBEX-35 index also climed during the day, despite Spain's borrowing rate nearly doubling on three- and six-month Treasury bills after its central bank said the country was back in recession.

Financial markets in the 17 countries that use the euro were shaken on Monday on concerns that an agreement on strict deficit targets agreed to by European leaders earlier this year was beginning to unravel.

Equities received a triple beating after first round French election results pointed towards a new socialist president, the Dutch hardliner-austerity government resigned and European economic data came in much worse than expected.

Fears that France and the Netherlands could derail plans to tackle Europe's debt crisis wiped £27.6bn off the value of London's FTSE 100 share index in one day.

The UK's blue chip index almost surrendered the whole of last week's 2% gains in one session as investors' appetite for risk was sapped.

Investors remained tense about the eurozone's commitment to austerity on Tuesday.

German Chancellor, Angela Merkel, defended her drive for European budget discipline.

She said that "no one will accept it from us, in any European country" if governments simply continue to carry huge debts.

Meanwhile, in Greece, the central bank is now forecasting a 5% contraction in the crisis-hit country's economy in 2012, more than the 4.75% reduction in annual output predicted by the EU.

Presenting his annual report, Bank of Greece governor George Provopoulos urged all political parties to stick to Greece's punishing austerity measures after the May 6 general elections.

He warned that political uncertainty would have "particularly harmful" consequences for the economy.

Spain's budget minister Cristobal Montoro told his Parliament on Tuesday that the country was at an "extremely fragile" moment, as he defended a 2012 budget with 27bn euros (£22bn) in austerity measures.

He argued that the budget measures would help to restore confidence in Spain.

Former International Monetary Fund (IMF) chief economist and Harvard University professor, Ken Rogoff, told Sky News that the eurozone's status quo would not become stable, despite bailouts and other interventions.

"They are going to need a tighter union and I think some of the countries will end up outside of that at least for 30 or 40 years.

"I don't see the status quo being preserved," he said.

Mr Rogoff said that the new $430bn (£267bn) debt firewall agreed by the IMF would not be enough to prevent a further crisis in Europe.