Europe debt crisis: EU moves too little, too late?
Greece's new leader today submitted a draft budget while Italy has presented an austerity program. But investors are skittish as EU debate rages over how best to address the Europe debt crisis.
Europe seemed to make the right moves towards solving the eurozoneâ€™s sovereign debt crisis this week, and with the political stalemate in Greece and Italy finally broken, Europeâ€™s leaders were hoping for a bit of breathing space.
Yet markets instead have responded negatively as an increasingly fierce EU debate over the role of the European Central Bank (ECB) undermines investors' trust that the eurozone will recover. Many experts believe that the attempts of Europeâ€™s southern countries to reform are coming too late.
â€śAll forecasts indicate that European economies are either already in recession or only a step away,â€ť says Sebastian Dullien, an economist at Berlinâ€™s HTW University. â€śAusterity will put additional pressure on these economies. They will need help from outside to sort their debts and get back to growth.â€ť
Greek, Italian moves fail to soothe markets
Greeceâ€™s new prime minister Lucas Papademos, who headsÂ an emergency cabinet that is supposed to keep the country from defaulting, won a vote of confidence this week with a comfortable majority. That victory allows him toÂ now embark on reforms Greece needs to implement before it gets fresh money from the EU and the International Monetary Fund. Today Greece submitted a draft budget ahead of meetings today and tomorrow with the EU, the IMF, and the ECB.
In Rome, Italyâ€™s new prime minister Mario Monti, the ex-central banker who succeeded Silvio Berlusconi, presented a cabinet consisting exclusively of technocrats instead of career politicians. The cabinet also presented an austerity program that, Mr. Monti said, was vital for the survival of the eurozone.
â€śWe must make sure Italy is no longer perceived as Europeâ€™s weakest link,â€ť he said.
But the markets didnâ€™t buy it. Sovereign bond yields for Italy remained high, while yields for Spanish and French 10-year bonds rose â€“ close to the critical 7 percent mark in Spain. At that level, borrowing gets prohibitively expensive. When countries like Ireland and Portugal crossed that threshold, they were forced to ask for help from the EU.
Should the European Central Bank intervene?
Spainâ€™s Prime Minister JosĂ© Luis RodrĂguez Zapatero launched a dramatic appeal to his eurozone partners. â€śWe need a European Central Bank that does justice to its name and defends the common currency,â€ť he said on Thursday, suggesting that the ECB should on a large scale buy bonds of countries under pressure. This appeal was mainly directed at German Chancellor Angela Merkel.
Germany is strictly opposed to the ECB intervening on behalf of struggling economies. Wolfgang Franz, who heads the German governmentâ€™s council of economic advisers, calls it â€śa deadly sin.â€ť
â€śThereâ€™s a deeply engrained fear of inflation in the German collective consciousness,â€ť says Mr. Carl-Ludwig Holtfrerich, an economic historian at Berlinâ€™s Free University. â€śGermans living in the first half of the twentiethÂ century saw their savings wiped out twice when the central bank started the printing press. The memory is still alive.â€ť
Germany proposes strict measures
Chancellor Merkel has made it clear that she wants the European Treaties to be changed. Those members of the eurozone who donâ€™t stick to the rules and overspend should be taken to the European Court of Justice, she demands.
Germany is also supporting the idea of levying a tax on financial trading, an idea very much opposed by the US and especially Britain â€“ the latter worried about preserving London's status as an international hub of finance.
It is doubtful though that Germany is going to use all these bargaining chips, says Mr. Dullien. â€śIf the choice is survival of the euro or the ECB turning into the lender of last resort, Germany is not going to walk away from the euro. And chances are, this decision has to be made soon.â€ť