The growing gap between the euro zone’s two core powers has raised a question, particularly for the Germans: How far are they willing to go to save the euro?
To date, every attempt by Europe’s leaders to quell their fiscal emergency has fallen flat, and the region may be running out of time. With debt woes spreading beyond near-bankrupt Greece and Italy, the bailout fund established to prop up troubled nations is now seen as too little, too late. A plan to bolster that fund has fallen prey to market fears.
That, experts say, has left the Europeans with dwindling options.
At the center of the debate is whether the European Central Bank should fire up its printing presses, creating euros that would guard against a potential string of government defaults in the region.
But the ECB, which acts as the central bank for the 17 countries that share the euro, has always been conservative, in part because Germany has bitter memories of Depression-era hyperinflation.
With France, the region’s second-largest economy, seeing its borrowing costs rise this week to the highest level in 14 years, the alarmed government in Paris is calling for the bank to quickly shed that conservative nature.
“The ECB’s role is to ensure the stability of the euro but also the financial stability of Europe,” French Budget Minister Valerie Pecresse said Wednesday in Paris. “We trust that the ECB will take the necessary measures to ensure financial stability in Europe.”
In their public remarks, German officials are holding firm to a narrow role for the central bank, despite the region’s worsening conditions. Speaking in Berlin, German Chancellor Angela Merkel publicly reasserted Germany’s position that the bank’s governing rules prevent it from bailing out nations or playing a more active role in crisis containment.
“The ECB doesn’t have the possibility of solving these problems,” Merkel said, adding, “We still don’t have an adequate answer about the future of the euro zone.”
Merkel has been stuck between rapidly deteriorating markets and a German public that is dead set against being made responsible for the debts of others. Punctuating those fears, Philipp Roesler, the economics minister, took to German television last week to reassure Germans and put down rumors that the nation’s gold reserves might be tapped to solve the crisis.
At a political convention this week, Merkel said the debt crisis was “maybe Europe’s most difficult hours since World War II.” Her party agreed to push for changes to bolster economic integration in the euro zone, unthinkable in Germany just a year ago.
But those changes would take too long to have any real impact in the crisis, economists say. And perhaps more noticeable to investors this week was an accompanying recommendation that countries be allowed to leave the euro voluntarily, yet another sign that the currency is not as sacrosanct as European leaders had sworn until earlier this month.
Still, there are some signs that Germany’s position may be softening. A group of Merkel’s top independent economic advisers recommended last week that Europe move toward issuing collective debt for the first time, using the gold reserves of all 17 nations to create a $3.1 trillion rescue fund. In exchange for injections of funds, troubled nations would need to make fast progress cutting budgets and implementing major economic changes.
Peter Bofinger, a member of that adviser group, also called Tuesday for the ECB to become a lender of last resort — setting maximum borrowing rates for euro-zone nations and intervening if markets drive them above that level. The group is influential in Germany, and such calls may spark a shift in attitudes in a country long conditioned to avoid inflation and excessive borrowing at all costs.
Nevertheless, the Germans still appear terrified that printing money to shore up ailing countries — particularly Italy — will rob their neighbors of incentives to cut spending and make long-overdo economic changes.
Italy is a case in point. In recent days, market turmoil has forced out the nation’s longtime prime minister Silvio Berlusconi, who was seen as an obstacle to passing real reform. Its new prime minister-designate Mario Monti, an economist, is expected to win backing in Parliament this week for a freshly unveiled cabinet of technocrats who hope to move quickly toward the kind of economic changes Italy has resisted for decades.
But with Italy’s borrowing costs already brushing up against unsustainable levels, analysts warned that it may not have the time it needs to regain market confidence.
“The Germans are against a more aggressive ECB, but if Italy gets into real trouble, their other options become extremely limited,” said Zsolt Darvas, research fellow at Bruegel, an economic think tank, in Brussels.
Birnbaum reported from Madrid. Staff writer Howard Schneider in Washington contributed to this report.