As European Union leaders prepare for yet another crisis summit meeting next week to discuss fundamental changes in economic governing, there are growing concerns that the latest potential approach — a more aggressive intervention by the European Central Bank — will not be enough to stabilize the markets and preserve the euro.
The assumption has been that if political leaders can convince voters in their countries that they are capable of enforcing greater discipline and centralized intervention in national budgets, as Germany demands, then the European Central Bank will have the political breathing space to move more aggressively to support the bond sales of Spain and especially Italy. The thought is that the bank can flood the market, driving down interest rates to tolerable levels, buying time for Europe to fix its debt problems and overhaul laggard economies.
But with Europe veering toward recession and with increased skepticism that discipline will solve the deep structural imbalances in the euro zone, the markets’ concerns have passed from doubts about the solvency of individual countries to fears for the euro zone as a whole. Those doubts now include Germany, which cannot by itself, even if it wishes to, guarantee the credibility of Italian and Spanish debt, which totals more than $3.3 trillion.
For Kenneth S. Rogoff, an economics professor at Harvard, the biggest problem for the euro is not money so much as structure, or the lack of it. “This is a deep constitutional and institutional problem in Europe,” Mr. Rogoff said. “It’s not a funding problem.”
Yet, with even German interest rates rising, the markets are now worried about the sustainability of the euro zone as a whole, said Simon Johnson, a former chief economist for the International Monetary Fund and a professor at the M.I.T. Sloan School of Management. “The market has signaled that the risk is relative currency risk, not sovereign risk,” Mr. Johnson said. “So a ‘big bazooka’ won’t work for Europe now, because of worries about the euro itself breaking up and German interest rates going up.”
The last plan that was supposed to stop the rot, agreed upon last July but not put fully into place until mid-October, was the European Financial Stability Facility , with a lending capacity of 440 billion euros, or about $587 billion. While large enough to cover, as intended, a second Greek bailout, Ireland and Portugal, it is far too small for Italy and Spain, which are now in play.
And efforts to “leverage” the fund upward, a crucial element of the “big bazooka” Mr. Johnson referred to, are falling considerably short of the $1.35 trillion target, European officials acknowledged Wednesday. That failure is in large part because, as Mr. Johnson noted, the bond spreads for even the AAA-rated euro zone countries are going up, leaving less leeway for leveraging.
Mr. Johnson is a euro hawk, predicting a breakup of the euro zone. Others say Europe has more time, especially if the European Central Bank can intervene to support Italy more forcefully, which by its charter it is not supposed to do, at least not directly.
If so, Mr. Rogoff said, “the Europeans can stretch it out a long time, they have the money.” Nevertheless, he said, they “need to take a big step toward economic and political union, whoever wants to be a part of it.” Germany “is right to hold out for systemic changes,” he said. “The Europeans hoped to have 30 to 40 years to integrate more fully. Right now they don’t have 30 to 40 weeks.”
Some say they have far less than that.
“We are now entering the critical period of 10 days to complete and conclude the crisis response of the European Union,” said the bloc’s economics commissioner, Olli Rehn, on Wednesday.
France and Germany are concentrating their efforts on a fundamental shift in powers among the 17 European Union states that use the euro, seeking to amend the bloc’s treaties to allow more centralized oversight of national fiscal and budget policies, and more centralized interference in them, too. Penalties would be assessed on those countries that violate the rules of economic discipline, which will be tightened and clarified.