Doubts mount as Europe struggles with next steps in euro crisis
European stocks as well as the euro dropped as optimism from last week's euro crisis summit yielded to tough questions about the EU's ability to avert fresh crises.
A new “fiscal union” treaty engineered by Germany to confront the euro crisis came with historic overtones last week. But whether the deal can staunch the immediate crisis facing Italy, Greece, and Spain is unclear as this week a slightly sour mood settled over the Continent.Skip to next paragraph
Subscribe Today to the Monitor
Governments including Ireland, Sweden, Hungary, the Czech Republic, Finland, and The Netherlands face questions about ceding budgetary sovereignty to the European Union. It is a week so far of strikes over austerity, lackluster growth forecasts, doubts about German Commerzbank, and a continued flirting by Italy with a prohibitive 7 percent borrowing rate figure for both five- and 10-year bonds. The euro today dropped to a near-one-year low on fears of ongoing instability, while London's FTSE-100 index lost more than 2 percent and France's CAC-40 index fell more than 3 percent.
"A lot of the excitement over the treaty has given way to other realities setting in … we are now in an ‘Oh, but…’ moment,” says Sony Kapoor of the Brussels think tank Re-Define. “[European leaders] had nothing to say about growth, and we are still staring at a deep recession that will worsen the debt crisis.”
As Europe’s third-largest economy, Italy faces huge ($220 billion) debt repayments by March and popular anger over austerity. New Prime Minister Mario Monti vows a new budget will quiet markets. (This week, Italy’s 950 members of parliament, whose salaries are double that of their German and British counterparts, debated pay cuts.)
French officials continue to brace for a possible loss of the nation’s AAA rating, even as Fitch Ratings forecast a “significant” downturn in the eurozone and Moody’s put eight Spanish banks on review for a downgrade.
French Socialist presidential candidate François Hollande says the fiscal union concept agreed to last Friday by 26 EU members – Britain did not join in – to tighten fiscal discipline, lacks a significant growth component, and vowed to renegotiate it if elected next spring.
Last Friday’s treaty was hailed as a kind of landmark and a triumph for German Chancellor Angela Merkel. The deal represents a greater institutional effort to force budgetary oversight on eurozone members to hew to targets agreed to years ago in the Maastricht Treaty, a founding treaty of the European Union, impose sanctions on violators, and mend complex institutional flaws. A permanent “stability fund” to be capped at €500 billion will come online a year early. The new treaty rules essentially create “more Europe” as Ms. Merkel puts it, albeit a more German-influenced Europe, and will theoretically avert new crises.
Yet whether European leaders have thwarted the immediate crisis on their doorstep is the question.
The Dec. 9 summit was only the most recent in two years of summits that have been criticized as offering too little and too late, creating uncertainty about Europe's resolve in markets and causing frenzied attacks on Irish and Portuguese bonds that eventually forced those countries into bailouts. The crisis was spawned by a huge Greek debt first revealed in December 2009.