European leaders this weekend are convening another meeting to address the problems, which are among the chief risks to the global economy. This is the third such gathering since late 2009, when concerns erupted about a possible default by the Greek government on its government bonds. If the prior meetings are any guide, European leaders may succeed in tamping down the crisis for now.
But as finance ministers from the euro nations began deliberations in Brussels on Friday, hopes for the type of ambitious action urged by U.S. officials and some others seemed to be fading. The best hopes for the euro project itself may have faded, as well.
“The whole system thought you could get something for nothing — once you get the euro it is beautiful . . . ” said Andre Sapir, an analyst at the Bruegel think tank here.
For much of the past decade, the common currency made many investors think that all of the euro zone’s members were an equally safe bet. So even highly indebted countries such as Italy and Greece could borrow money at rates not much different from that of Germany, the engine of European economic growth. But now, Sapir is among those who doubt that anything the region’s leaders do — short of basic changes in the treaty underpinning the euro — will bring back those days.
“Is it possible to turn the corner without a new treaty, a new contract? Is it possible to solve the problem of confidence within the existing rules? That is a fair question,” Sapir said.
A recent IMF report said that financial stress in countries such as Greece, Portugal and Spain may be permanent and will leave Europe divided into economic tiers. The healthiest tier, which could include Germany and some fiscally strong neighbors, would be able to borrow cheaply and compete effectively in the world economy. The others may face interest rates more akin to a developing country and struggle to stay afloat.
Italian and Spanish bond rates have risen to more than 5 percent, more than double that of Germany. The programs being debated in Brussels are meant to bring those rates down, but many analysts say they doubt that the cheap credit of the euro’s early years will ever return. During the past two years, investor faith in Greece, Ireland and Portugal grew so dim that the nations could not borrow money at affordable rates and had to resort to emergency financing from their neighbors and the International Monetary Fund.
Differences in borrowing costs “are here to stay in the countries currently under pressure. And they might still increase from their current level in other countries,” the IMF said in a recent review of the euro area.
At each stage of addressing the crisis, European leaders acted as if they were just one or two good decisions away from restoring investor confidence and reviving the health of the financial system.
But the past two years have revealed what investors and political analysts say are underlying problems with the euro zone’s basic architecture.
The European Central Bank, for example, was created with a singular aim — controlling inflation — that is narrower than the mandates of other large central banks such as the U.S. Federal Reserve or the Bank of England. The debt crisis has made clear that none of the 17 nations in the euro zone can count on the same sort of support that the Fed offered during the U.S. financial crisis that began in 2007. As the U.S. financial system heaved and the economy slowed, the Fed took exceptional steps to prop up the markets for certain types of securities and pumped hundreds of billions of dollars into the economy through massive bond purchases.
Belgian economist Paul de Grauwe recently argued in a paper that euro-zone countries issue bonds in a currency they have no power to influence because they do not have central banks.
Traditionally, countries can count on their central banks in a pinch to provide money needed to pay off government bonds when they mature. “There is an implicit guarantee that the central bank is a lender of last resort in the government bond market,” de Grauwe wrote. But euro-region governments “cannot guarantee to the bondholders that they will always have the necessary liquidity to pay out the bond at maturity.”
That distinction didn’t matter until governments started struggling to pay their bills.
The ECB has taken exceptional steps during the crisis — including a program to help Spain and Italy by buying their bonds — that even some central bank board members say violates its governing mandate. ECB leaders are reluctant to take even more expansive action. But without the bank’s involvement, efforts to create bailout programs large enough to protect a major economy like Italy from possible default seem sure to fall short.
Other underpinnings of the euro-zone financial system have also come undone.
It can no longer be assumed, for example, that European government bonds carry no risk of default, though bankers and regulators have treated all such bonds as risk-free.
At the same time, the commitment of euro-zone countries to stand behind one another no longer seems ironclad. Two years into the crisis, Greece’s fate is in jeopardy because of arguments over who will pay the bill.