Although markets seemed to take comfort Monday from reports that European leaders were considering longer-term solutions, economists warned that investors are looking for a shorter-term rescue plan to mitigate the crisis.
Some of Merkel’s allies have indicated that they may flip once they receive guarantees that neighboring nations will spend money more like Germany does.
“People are saying she’s still playing poker, and she will push the system even further,” said Ulrike Guerot, the head of the Berlin office of the European Council on Foreign Relations. “But nobody wants the system to crack.”
On Monday, the gulf between Germany and the rest of Europe was underscored when Moody’s and the Organization for Economic Cooperation and Development, an international forum that includes the United States and 33 other leading economies, issued dire warnings about Europe’s future, with the OECD calling the euro-area crisis “the key risk to the world economy.”
“Prospects only improve if decisive action is taken quickly,” OECD chief economist Pier Carlo Padoan told reporters in Paris. In the euro area, he said, “the risk of contagion needs to be stemmed” with “much greater firepower.”
In Germany, meanwhile, a monthly survey of consumer confidence released Monday showed a sharp upswing in the willingness of German consumers to spend money despite the maelstrom beyond their borders, although a surprisingly poor bond auction last week showed that Germany wasn’t immune to the plight of the rest of the continent.
Many economists say Europe has only two options left in its fight against the debt crisis: either fire up a printing press that can churn out piles of new euros to keep troubled countries’ borrowing costs lower or use Germany’s mighty economy to underwrite the debts of its neighbors.
Neither solution is popular in Germany, which is still seared by memories of 1920s hyperinflation. German taxpayers are resistant to paying for what they view as the economic mistakes of less-disciplined neighbors, and much of the powerful academic establishment is lined up against anything that could create moral hazard, or the notion that a bigger solution to the crisis could rob the incentive from profligate nations to change their ways.
German officials said Monday that they were pushing for fast changes to European economic governance that would give the European Union far more say in how individual countries form their budgets. Many have criticized Merkel for pushing for changes that could take years to implement, but her spokesman said Monday that they could be put into place far more quickly.
A summit starting Dec. 8 will discuss treaty changes, spokesman Steffen Seibert told reporters Monday, and Merkel will outline her positions to the German Parliament on Friday.
“We believe that Europe can’t wait for this forever, but also that it should be possible to put such limited change into effect in what for some is a surprisingly short time,” Seibert said. He called it an “ambitious timeline.”
Several of Merkel’s Christian Democratic allies in Parliament have said that they won’t consider common European debt without increased economic union — leaving open the implication that German support for euro bonds could come in exchange for other countries’ acceptance of Germany’s strict opposition to excess borrowing and spending.
For now, few in Germany think the more radical solutions are tools to be used to immediately fix the problems.
“Other countries look at it as part of that approach,” said Klaus Deutsch, an economist at Deutsche Bank Research. “The Germans have it as part of the reverse order. You do the tough stuff first, and maybe you get the nice stuff at the end.”
On Monday, Belgium became the latest nation in Europe to suffer a miserable bond auction, with weak demand and investors driving its borrowing rates up to record highs after a credit downgrade.
Some observers insist that Berlin is putting too much emphasis on moral hazard.
“If I were a German citizen, yes, I would be upset about what is happening in Italy,” Vincenzo Visco, a Rome-based economist and former Italian finance minister, said in a recent interview. “But I would also be upset by the fact that my government did not act to stop this crisis months ago by reassuring investors it was absolutely committed to helping Greece, where this all began. Had they done that, this crisis never would have spread to Italy.”
Faiola reported from London.