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Why Europe's debt crisis is still spreading

European credibility seems to be the issue. Investors are increasingly edgy over whether EU policymakers can agree on how to ease the debt crisis.

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Still, Spain successfully sold 3.3 billion euros ($4.6 billion) in short-term sovereign bonds Thursday, with almost twice the demand than the offering, a sign that markets believe Spain is delivering on its economic reform plan. It had to offer the highest returns since 2008 though.

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Italy’s cost of borrowing has risen proportionally more though as markets continue to question whether politicians will be able to deliver on its austerity plans.

France, Belgium, and other countries are also facing growing uncertainty at the national level.

The eurozone's problem

But the overarching concern is over the whole, not the parts. On paper, any one of the countries other than the three that have already been bailed out –Greece, Ireland, and Portugal – are capable of paying their debts. Even if they couldn’t, investors have so far given European leaders the benefit of the doubt that they will eventually step in.

More than country finances, it’s a credibility issue of the EU. Germany, the eurozone’s piggy bank, and other export economies like the Netherlands are reluctant to support an unconditional bailout on their dime. The fiscal conservative block has set conditions to increasing a bailout fund and other rescue mechanisms.

But those conditions are onerous and more importantly unlikely to be approved by all European parliaments, as required. Either Germany and friends backtrack, and risk a rejection in their own parliaments, or the rest of Europe does. A consensus has so far has been elusive and even if there is one, the mechanisms wouldn’t be in place at least until October.

“Markets highlight, first and foremost, the undisciplined communication and the complexity and incompleteness” of Europe’s expanded bailout mechanisms that leaders agreed in July, Barroso said. “Concretely, I would like to call on you to accelerate the approval procedures."

But the German government appeared unfazed Thursday, saying EU talk of crisis at the national and region level was untimely, signaling it’s not warming to its block partners’ pleas.

Whether Italy and Spain can weather the storm much longer is uncertain. But the EU’s economy and perhaps the world’s could be at stake.

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