Make us your home page

Even as governments act, time runs short for euro

BERLIN — The window of opportunity to save the euro is rapidly closing, as the sovereign debt crisis erodes the solvency of Europe's banks and drives up borrowing rates for even once rock-solid countries like France.

On Saturday, the crisis swept away its second leader, when Prime Minister Silvio Berlusconi resigned after 17 years of dominance in Italian politics to the jeers and cheers of crowds in Rome. Both there and in Greece, jumbled parliaments came together with urgency to install more technocratic governments that are committed to delivering the difficult reforms and austerity measures demanded by the European Union, the European Central Bank and the International Monetary Fund.

Despite those drastic and tangible steps, though, there is a host of problems that could quickly overwhelm Europe's progress.

Looming over all the discussions of reform and financing mechanisms is the slowdown in the Continent's already anemic growth rate, to 0.5 percent in 2012, and even the threat of a double-dip recession, the European Commission said in a forecast last week.

That calls into doubt the adequacy of the eurozone's latest attempt to placate the markets, the lagging effort to bolster the $605 billion European Financial Stability Facility to $1.4 trillion or to find other funding. The task will become that much harder in a recessionary environment, especially as France's credibility with investors begins to decline.

"I think we're in very dangerous territory, and the eurozone has to act soon," said Simon Tilford, chief economist for the Center for European Reform in London. "There isn't really a muddle-through option right now. And those who argue that it's possible for the south and Italy to default or deflate into competitiveness are fanciful and flying in the face of evidence."

The damage that can result, Tilford said, is potentially severe "to their economies, debt burdens, social and political stability, democratic accountability, and their belief in their European allies and in the European Union itself."

At the center of it all sits Germany, leading the bloc of Northern European countries, which also includes the Netherlands and Finland, steadfastly maintaining that austerity and fiscal rectitude on the part of the debtors, no matter how painful, represent the only path to resolving the crisis.

Any proposals to share the burden with the heavily indebted countries by collectivizing European debt — even though they may have contributed to the prosperity of the northern countries by consuming their exports — are rejected out of hand, largely for fear of a political backlash.

When Germany's council of independent economic advisers proposed to Chancellor Angela Merkel last week a way to share European debt to protect Italy and Spain, she dismissed the idea as impossible without changes to EU treaties. She has also opposed any expansion in the European Central Bank's role in buying up the bonds of the indebted countries, which could hold down interest rates on their debts, let alone allowing the bank to guarantee Italian debt.

But critics say there is no time for the treaty changes Merkel is talking about; those could take years to put in place.

"The crisis must be solved right now, and it simply will not wait for these instruments to fix it," said Bernhard Rapkay, chairman of Germany's Social Democrats in the European Parliament.

The vulnerability of Italy — the third-largest economy in the eurozone and the fourth-largest debtor nation in the world — has brought the crisis into the core of the eurozone. "We've entered a make-or-break scenario," said Thomas Klau, a German who heads the Paris office of the European Council on Foreign Relations. "The present situation with Italy now is sustainable for days, perhaps weeks, but not months. This new chapter either writes the endgame of the eurozone, or it precedes a much bigger leap into political and economic integration than all those made so far."

With each bout of uncertainty, speculative attacks come closer to the core of the EU. Greece teeters, Italy wobbles and France begins to tremble. The precariousness of the situation was on full view Thursday when a leading ratings agency, Standard & Poor's, mistakenly suggested on its website that it had downgraded France's prized AAA rating, prompting a sell-off in French government bonds.

Even as governments act, time runs short for euro 11/12/11 [Last modified: Saturday, November 12, 2011 11:08pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, New York Times.

Join the discussion: Click to view comments, add yours