Strikes hit Rome, Madrid in midst of debt debate, slowdown
By Howard Schneider,
DUBLIN — Workers marched in Italy and Spain on Tuesday to protest planned spending cuts as new data confirmed fears of an economic slowdown across Europe.
Regional stock markets dropped for a third day, and some had lost about 10 percent of their value since Friday. After a sharp sell-off Monday to start the week, the Stoxx 50 index of euro-zone companies shed an additional 1.8 percent Tuesday.
U.S. stocks also slid for the third straight day Tuesday, although they rose above the day’s lows in a late-afternoon rally. At the close, the Dow Jones industrial average was down 0.9 percent; the Standard & Poor’s 500-stock index, 0.7 percent; and the Nasdaq composite index, 0.3 percent.
The White House said Tuesday that it was confident Europe would be able to manage its growing debt crisis.
“The Europeans face a difficult challenge, but we believe they have both the ability and the will to meet those obligations,” White House spokesman Jay Carney said, adding that President Obama and senior aides had been in regular consultations with European leaders.
Asian markets rebounded in Wednesday trading. Japan’s blue-chip Nikkei 225 index ended its morning session up 1.4 percent.
The market declines in Europe and the United States reflect widening concerns about the euro-area economy as governments battle a complicated and interconnected set of problems that have confounded them for nearly two years. Leading analysts have compared the situation to the months leading up to the 2008 collapse of Lehman Bros. and have warned that a fragile global economy could not stand another financial crisis of that magnitude.
But the sense of instability is clear, from the streets of capitals clogged with striking workers to the offices of central banks.
Officials at the Swiss National Bank surprised markets Tuesday by imposing a minimum exchange rate of 1.20 francs to the euro. The Swiss have been struggling to curb their soaring currency, which has become a haven amid jitters over the euro and which threatened the Swiss economy by driving up the price of the country’s exports.
Some analysts said they feared a disruption in currency markets if other nations take similar measures to keep their currencies from rising as the dollar and the euro slump.
The Swiss bank said it was prepared to buy “unlimited” amounts of foreign currency to support the minimum exchange rate. The Swiss franc fell nearly 8 percent against the euro for the day.
Also Tuesday, Greece’s finance minister sought to calm fears that his country was at serious risk of a second default, the Associated Press reported. Evangelos Venizelos pledged to speed up delayed reforms meant to trim the country’s bloated public sector, open tightly regulated professions to competition and kick-start an ambitious privatization plan.
“Greece is not the pariah of the European Union. It is not a permanent sore and problem,” Venizelos told reporters. “It is an equal, competitive country that has a very serious problem regarding its public debt and fiscal deficit. We can and shall overcome this, but not without carrying out the structural reforms in full.”
Euro-area leaders were continuing talks in Berlin on Tuesday over an expanded rescue program for the debt-burdened nation.
In Washington, the trade group representing major financial companies said it had become increasingly worried that new rules meant to strengthen the banking system were undercutting economic growth. According to a study by the Institute of International Finance, the new banking rules, set by a committee of world central bankers convened in Basel, Switzerland,, are forcing banks to boost capital and cash levels when the economy needs stronger credit growth.
Because of growing mistrust, particularly in the European banking system, capital is becoming more expensive to raise, another drag on bank profits, performance and lending. Even as the Federal Reserve Bank loosens the U.S. money supply to try to boost the nation’s economy, the bank capital rules are pushing institutions to be more conservative, said the IIF’s managing director, Charles Dallara.
“It is essential to find the right balance in this process, especially at a time of pronounced economic weakness,” Dallara said.
Updated statistics showed that growth in the 17-nation euro area slowed sharply, to 0.2 percent, in the second quarter, compared with 0.8 percent for the first three months of the year. German factory orders fell in July, confirming a slowdown in the area’s largest economy.
Analysts also said the measures that make up the gross domestic product warn of contractions on the way. Household spending is expected to continue falling as governments cut budgets, slash public-sector payrolls and take other steps to trim deficits, and exports, the one bright spot for countries such as Spain and Ireland, are beginning to dip as the world economy slackens.
The data cast “further doubt on the region’s ability to grow its way out of the debt crisis,” Ben May, European economist for research consultancy Capital Economics, wrote in an analysis of the latest figures.
The strikes in Italy and Spain were aimed at government efforts to control public debt and to maintain confidence that the two countries will be able to pay their bills without international bailouts of the sort that Greece, Portugal and Ireland required this year. Italy, in particular, would strain the available euro-area resources if it needed to be rescued. The Italian Parliament is debating how to trim its budget by $60 billion, and union members said they want to protect the social programs and benefits built up for Italian workers.
In Athens, Venizelos’s announcement came as Greece’s borrowing costs hit a record high amid fears related to the government’s faltering austerity program and the deeper-than-expected recession.
Euro-area leaders accepted an expanded debt-relief program in principle at a July 21 meeting, but talks stalled after Finland demanded that Greece post collateral for Finland’s share of an emergency loan. Failure of the 17 parliaments to approve the new program for Greece could put the country at risk of default again. That would threaten the many European banks that have lent money to the Greek government.