It’s not just Italy anymore. Spain’s borrowing costs are rising. French bond yields keep ticking ominously upward. The market conflagration is threatening to spread to all of Europe. Yet European leaders — especially German Chancellor Angela Merkel — still refuse to give their blessing to the European Central Bank to fire up the printing presses and start guaranteeing the debts of sovereign countries. Instead, E.U. officials have now resorted to dreaming up convoluted bailout schemes.


No bailout for you! (Odd Andersen/AFP)

In The Washington Post today, Michael Birnbaum reports that France and Germany are still at odds over how to solve the crisis. French officials are watching with horror as their once-low borrowing costs rise, and some French ministers are now suggesting that the European Central Bank needs to do its part to guarantee financial stability. “The best way to avoid contagion is to have a solid firewall” provided by the central bank, French Finance Minister Francois Baroin said.

German leaders like Merkel, on the other hand, have warned the ECB not to intervene too heavily, as officials are worried that a central-bank guarantee might take away incentives for countries like Italy to carry out fiscal and market reforms. In essence, Merkel said on Wednesday, Europe would be sacrificing long-term competitiveness for a quick fix.

“Still,” Birnbaum adds, “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.” And one member of that very Germany advisory committee called on the ECB to become a lender of last resort. A euro zone implosion has a way of concentrating the mind.

Meanwhile, fresh warnings are sprouting up about how the euro zone crisis could cripple the United States. Sandra Pianalto, the president of the Federal Reserve Bank of Cleveland, warned today that a slowdown in Europe could cut U.S. growth by 0.5 percent in the next two years. And Fitch Ratings sent U.S. stocks tumbling after the agency reported that U.S. banks face a “serious risk” to their credit rating if the financial turmoil in Europe continues.