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Europe debt crisis shows signs of easing

The debt crisis in Europe showed signs of easing Wednesday, as heads of state said that Greece will keep using the euro currency, helping soothe the fears of a financial collapse on the continent and driving markets up.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said they are “confident that Greece’s future is in the euro zone,” after a teleconference between the two leaders and Greek Prime Minister George Papandreou, according to a statement from Merkel’s spokesman.

That was enough to ease some of the mounting fear on global markets that the Mediterranean nation might default on its debt and pull out of the 17-nation euro currency zone, potentially causing calamitous ripple effects across the world financial system.

U.S. Treasury Secretary Timothy F. Geithner said at a conference in New York that Merkel has told him that she will not allow a financial collapse akin to the one that followed the bankruptcy of Lehman Brothers in 2008. “I think she recognizes that they’ve got to do some more to make sure that they make that commitment credible to the world,” Geithner said.

The German stock market was up 3.4 percent, and the value of the euro rose 0.6 percent against the dollar, retracing part of a steep decline over the past two weeks. U.S. markets rose as well, with the Dow Jones industrial average gaining 1.3 percent to close at 11,247 and Standard & Poor’s 500 rising 1.4 percent to 1,189.

Also bolstering confidence that Europe’s crisis can be resolved was a report from a Chinese news agency stating that China is willing to buy debt of countries affected by the European panic. Separately, Chinese Premier Wen Jiabao on Wednesday stated that while countries must “put their own houses in order,” he also that, “What is most important now is to prevent further spread of the sovereign debt crisis in Europe.”

And the Italian parliament approved a package of 54 billion euros in budget cuts and tax increases that were meant to instill confidence in the nation’s finances. The interest rate Italy must pay to borrow money for a decade fell by 0.1 percent, to 5.56 percent, on the package’s passage.

Italian borrowing costs had soared until last month, when the European Central Bank began buying the debt to avert a crisis. In exchange for the purchases, however, the Italian government agreed to implement new austerity measures. They did not pass without disagreement, however. Protesters in Rome were dispersed with tear gas.

The latest developments come after days in which Greece’s ability to pay its debts — and the future of its inclusion in the euro zone — has appeared more in doubt than ever. The emergency teleconference between Sarkozy, Merkel and Papandreou was intended to reassure fearful markets about Europe’s direction.

The statement from Merkel’s spokesman added that Greece must adhere to a “strict and effective implementation” of the conditions underlying the bailout of the country, including tight budget-cutting measures and efforts to increase tax revenues.

Greece stressed that it would live up to the fiscal targets it agreed to as a precondition of receiving European bailout money. A government spokesman, Elias Mossialos, said after the conversation that the leaders had agreed that Greece is “integral” to the euro zone.

Irwin reported from Washington

Michael Birnbaum is The Post’s Moscow bureau chief. He previously served as the Berlin correspondent and an education reporter.



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