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Euro Zone Needs Political Union Urgently: Economist

The flare up of the euro zone’s debt crisis now hitting the core of the region has taken a dangerous turn but there is still some positive news out there, Erik Nielsen, Global Chief Economist at UniCredit told CNBC.

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“Things came back in a nasty way but remember there is a whole lot of mixture in the picture right now and yesterday was a bad day but I am not ready to throw the towel in just yet," Nielsen, who has been bullish on the resolution of the euro zone debt crisis, told “Squawk Box Europe”.

The Dutch Prime Minister Mark Rutte tendered his government’s resignation Monday following the collapse of talks to implement austerity measures in the Netherlands.

This spooked the markets, resulting in sharp sell-offs across the globe Monday. Moody’s, the credit rating agency, warned that the government's collapse was credit negative.

On Tuesday, the Netherlands raised just shy of 2 billion euros in its auction of two-year and 25-year sovereign bonds, middle of the target range of up to 2.5 billion euros ($3.3 billion) and market watchers expect borrowing costs to rise.

Spain has been in the eye of the storm in recent weeks as fears of its ability to rein in spending and reduce its budget deficit have been in focus. The country sold 1.9 billion euros on total of 3 and 6 month T-bills with yields rising in the immediate aftermath.

Yields on longer-term Spanish debt have fluctuated sharply in recent weeks moving beyond the crucial 6 percent mark with investors refusing to be placated by positive rhetoric from Madrid.

“It’s not only the euro zone that is suffering from austerity measures, recovery from recession has been a bit slower this time. The UK is not going to suffer from having ‘too’ much austerity,” he said.

Despite what is being seen as a backlash against austerity across Europe, Nielsen insisted it was the right path for indebted governments to take.

“It (austerity) must still be the right way but the question is how fast can you do it without causing trouble on the political side? That is what we are seeing in France and in the Netherlands,” Nielsen added.

Downward Spiral “Must be Broken”

Christoph Schmidt, Member of German Council of Economic Experts – a group dubbed the "wise men" who advise German chancellor Angela Merkel - said it was not enough to have austerity alone and politicians must get their house in order.

“The steps that are being taken by governments are the right steps but they are not sufficient.

We have a twin crisis of the banking crisis and sovereign debt and this is a negative, downward spiral. This has to be broken to rescue the euro zone area,” Schmidt told CNBC.

He acknowledged that for Germany it was a difficult balancing act to ensure solidarity with euro zone members at the same time combining that with getting the tough message of spending cuts and structural reforms through.

“Taking off the pressure too much releases governments from entering into structural reforms, but just structural reforms may not be enough,” he added.

Schmidt said Germany could not be paymaster for Europe indefinitely.

“It is not possible for Germany to pay for the whole bill. Solidarity must be combined with incentives but we must get something for it,” he said.

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