by Steven Erlanger, NY Times
Since the start of the euro crisis two years ago, the big fear has been contagion, that market unease about the high debt and slow growth in Europe’s southern rim would infect the core. On Wednesday, contagion arrived with brute force.
Italy, a central member of the euro zone and its third-largest economy, struggled to find a new government as anxious investors drove Italian bond rates well above 7 percent and the markets tumbled worldwide. And although critics have warned of just such an escalation for months, European leaders again were caught without a convincing response.
Unappeased by the imminent resignation of Prime Minister Silvio Berlusconi, investors appeared to have focused on the political gridlock in Italy that seemed likely to follow his departure from office, and the unenviable task awaiting a successor: restoring growth in a country that has seen almost none in a decade, and financing $2.57 trillion in debt. Italy, unlike Greece, is seen as too big to default and too big for Europe to bail out.
Only days after the Group of 20 meeting in Cannes, France, where President Obama and other world leaders urged European officials to take bolder action, they appeared frozen in past positions. The German chancellor, Angela Merkel, met with her kitchen cabinet of economic “wise ones.” They proposed the creation of a 2.3 trillion euro debt repayment fund that would pool and jointly finance debts of all 17 members of the euro zone in return for some conditions like legal debt limits and collateral.
But Mrs. Merkel effectively dismissed the idea, saying that it could be studied and would in any case require major treaty changes, which would take time. She instead emphasized that deep economic changes were required in some member states and that Europe needed to restore fiscal discipline.
“It is time for a breakthrough to a new Europe,” Mrs. Merkel said. “A community that says, regardless of what happens in the rest of the world, that it can never again change its ground rules, that community simply can’t survive.”
But the German prescription of austerity is not popular. It is Berlin, citing the very treaties that it now wants to adjust, that has resisted the boldest answer to the euro crisis — using the European Central Bank as the euro zone’s lender of last resort. Berlin does not even want to sanction American-style quantitative easing to promote economic growth, one recipe to stoking growth and reducing the debt burden.
“Contagion is alive and well,” said Rebecca Patterson, chief market strategist at J.P. Morgan Asset Management. Unlike Greece, she said, Italy could pose “systemic” risks to the global economy, accounting for 20 percent of the gross domestic product of the euro zone. “People are wondering if we’ve moved to a new level of the crisis.”
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photo: Justin Lane/European Pressphoto Agency
