Germany is pressing for tighter fiscal discipline through budget controls that would initially draw approval from a few of the 17 nations that belong to the currency union without requiring time-consuming revisions of the union’s treaty. Critics say the plan would effectively create two euro zones, a central one paying lower interest rates and a peripheral one paying higher borrowing rates.
Meanwhile, international investors are holding back, said people familiar with the financial industry, because of uncertainty about the future of the euro zone and worry about how further downgrades of sovereign bonds by credit agencies might hurt banks.
Banks in Europe have also practically stopped lending to other banks, a key task of the financial system that central banks are now performing. And international financial officials fear a self-reinforcing crisis of confidence that could slow down economies — and damage financial institutions and governments alike — just as experienced technocrats are taking charge in Greece and Italy.
“Europe needs to understand that financial markets don’t work on political timelines, and they are already a long way behind the curve,” Australian Treasurer Wayne Swan said in his weekly economic note over the weekend. He said European Union leaders had to act quickly to prevent a “slow-motion train wreck.”
“Over the past month, it seems to have been two steps forward, one step back for Europe,” Swan added. “The region’s policymakers have been frustratingly slow to build on the framework announced on October 27.”
In an interview Sunday on Canal Plus TV, France’s budget minister, Valerie Pecresse, said, “We won’t restore confidence unless we show proof — very quickly — about the unfailing solidity and solidarity of the euro zone.” In contrast with German officials, she said an “overhaul” of European treaties was needed that would include “real regulators, real sanctions” to restore confidence.
German finance minister Wolfgang Schaeuble said in an interview on ARD television Sunday: “We must together set up institutions that secure trust in the euro. Everything that detracts from that is damaging.”
European financial ministers meet this week, but next month holds bigger tests on the political and economic front. On Dec. 5, Italy’s new prime minister, Mario Monti, is due to present a new fiscal plan, most likely with the support of the country’s major parties but badly in need of support abroad. On Dec. 9, there will be a summit meeting of the E.U. that could be marred by disputes over euro bonds. Such bonds would be jointly issued by the 17 member states in the euro zone, but German Chancellor Angela Merkel has rejected the idea. Schaeuble called them “dangerous.”