German Chancellor Angela Merkel made it clear Germany remains vigorously opposed to any plan for the European Central Bank to bail out debt-swamped countries.Johannes Eisele/AFP/Getty Images
Angela Merkel's plea for "patience and endurance" to resolve Europe's financial woes Wednesday failed to lift a deepening sense of gloom over the continent's intractable debt problems.
In the wake of a fractious EU leaders summit, Ms. Merkel made it clear Germany remains vigorously opposed to any plan for the European Central Bank to bail out debt-swamped countries. The German Chancellor said only a stronger fiscal union will save Europe, not a "single blow."
The euro zone will survive, Ms. Merkel insisted, "if we have the necessary patience and endurance, if we do not let reversals get us down, if we consistently move toward a fiscal and stability union."
But Ms. Merkel's comments did nothing to help the euro, which fell to its lowest level since January, or fend off concerns that governments aren't moving quickly enough to restore confidence that their heavy debt loads are manageable. Italy, one of the world's most-indebted nations, paid a record high interest rate on a €3-billion ($4-billion) issue of 5-year bonds Monday.
At the heart of the euro zone crisis is the concern that major banks are at risk of failing, partly due to slumping values of their major holdings of government debt. Shares of Commerzbank AG tumbled more than 5 per cent, fuelled by speculation that Germany's second-largest lender may soon need a state bailout to meet new capital requirements set by Europe's top banking regulator. Germany already holds a 25-per-cent stake in Commerzbank.
"We are treading across a minefield," Toronto-Dominion Bank economists Beata Caranci and Martin Schwerdtfeger warned in a research report. "If Europe takes the wrong step, it will set off a global financial crisis."
The consequences could be more damaging to the global economy than that the financial panic of late 2008, triggered by the collapse of U.S. investment bank Lehman Brothers, the economists said.
"We are heading for this outcome unless euro zone leaders change their current approach and their resistance to bold decisive action," according to TD.
Some economists and politicians in Europe say the ECB could defuse the debt crisis by launching a massive U.S. Federal Reserve-style campaign of buying sovereign bonds, collectively backstopping euro zone debts. But Germany, financially the strongest among major European nations, has consistently resisted such calls, fearing such a move would lead to rampant inflation.
The leaders summit last week failed to impress investors long seeking a clear plan to quickly deal with Europe's financial crisis. At the summit, 23 of the 27 EU member countries agreed to a new, long-term fiscal pact. Britain, which isn't part of the euro zone, opted out, worried that it would mean sacrificing safeguards for its banking industry. Countries must still ratify the agreement over the next few months.
Bundesbank chief Jens Weidmann echoed Ms. Merkel's reluctance to let the ECB dramatically ramp up bond purchases. He said Germany is uncomfortable with the ECB's existing modest bond-buying program. Mr. Weidmann pointed out that the ECB's mandate prohibits unlimited bond buying – essentially, printing money.
But many of the euro zone's ailing members say it's time for drastic action. Ireland's European Affairs Minister Lucinda Creighton told reporters in Paris that the fiscal compact is "desirable" but won't "save the euro."
The answer, she said, lies in giving the ECB a green light to do "whatever is necessary."
Experts worry that the limited backstop offered to date would be too small to cope with a default of a major economy, such as Italy, let alone defaults by several smaller troubled countries.
In trading Wednesday, the value of the euro fell below $1.30 (U.S.) for the first time since January, continuing a wave of selling that began last Friday. Investors continue to worry that credit rating agencies may soon downgrade the debts of one or more euro zone countries and that France could lose its coveted triple-A rating.
Nervous investors forced Italy to pay rates of 6.47 per cent on an issue of five-year bonds, a new high. Rates on German bonds, considered a haven, are also rising.
Bank of Montreal chief economist Sherry Cooper is predicting a "a protracted period of recession and hardship" for Europe. She worried that neither a stronger fiscal union, nor greater ECB support, will ease the crisis.
"Competitiveness is the fundamental problem," she argued. "It gets far too little attention and is far tougher to deal with."