Germany's Deutsche Borse during trading on May 14, 2010.MARIO VEDDER/AFP / Getty Images
Europe's $1-trillion loan package was supposed to buoy the euro and buy time for countries such as Greece to rebuild their finances. It didn't even buy a week.
Doubts about the ability of Europe to weather its sovereign debt troubles are back and building, and the continent's common currency is plumbing depths not seen since the worst of the 2008 financial crisis.
German Chancellor Angela Merkel said Friday that Europe is in a "very, very serious situation" and that successfully negotiating the sovereign debt problem isn't a sure thing. That sounds a lot more grim than earlier in the week when she said the loan package that European leaders agreed to on Sunday "serves to guarantee and secure the future of the euro."
Deeper cuts this week to spending by governments in countries such as Spain and Portugal weren't enough to convince investors that the continent would be able to fix its fiscal problems in the breathing time created by the bailout, which is designed to help governments finance operations while they fix their balance sheets.
The spending reductions highlight the limited options for Europe, which is still a huge part of the global economy. The continent's governments can put off cuts to expenditures, which could lead to further pressure on the euro currency union, or tackle spending and in doing so hamstring economic growth.
"The market mulled over growth prospects for the euro zone amid drastic austerity in the periphery and the need for at least some austerity in the core, and it did not like what it saw," said David Watt, a currency strategist at RBC Dominion Securities.
The result was a brutal day in European markets Friday, with stocks plunging around the world, led by drops of as much as 6.6 per cent on major European indexes, and slumping prices for commodities such as oil. In Canada, the Standard & Poor's/TSX composite lost 0.84 per cent, and the Canadian dollar posted its biggest decline in a week.
Commodities plunged on the weak outlook for growth in Europe, and by extension, around the world. Oil fell to a three-month low, with a barrel of crude for delivery next month fetching $71.61 (U.S.) in New York trading.
The exception to the resource rout is gold, as futures touched a record high just shy of $1,250 an ounce. Bullion is soaring as investors seek a store of value in case the euro should continue its plunge. The euro sank to its weakest since the failure of Lehman Brothers Holdings Inc. in September, 2008, declining below $1.24 (U.S.).
The one bonus for Europe is that the sagging euro should goose economic growth, which is already stronger than many anticipated, judging by a raft of numbers released in recent days. Business confidence is climbing, and gross domestic product numbers in Portugal and Greece surprised some economists on the upside.
Maintaining that growth as governments cut debt by paring spending may prove difficult. The International Monetary Fund, however, said in a report Friday that getting budgets under control is crucial.
The IMF said that the world's overall budget deficit will shrink in 2010 from last year as governments pour less into stimulus, but the decline isn't going to be as much as the IMF expected in November, notwithstanding that growth in the global economy is looking stronger.
"As economic conditions improve, the attention of policy makers should now turn to ensuring that doubts about fiscal solvency do not become the cause of a new loss of confidence: Recent developments in Europe have clearly indicated that this risk cannot be ignored," the IMF said.