Panic ruled on the international stock markets on Friday. The German DAX index of blue-chip companies is on the decline, and on Wall Street and in the Asian markets, traders are shedding stocks in large numbers. One market strategist called it a "bloodbath." And investors are also looking at euro-zone problem states. Yields on Spanish and Italian 10-year government bonds have risen in recent days to their highest levels since the introduction of the common currency.
Uncertainties on markets actually should have calmed this week. The United States prevented a federal default on its debt at the last minute, and in Europe the results of a special summit on the euro at the end of July were celebrated as a success. But now, of all times, the mistrust of investors has penetrated the markets at full force. They fear that economic growth will stall and that nations worldwide will fall further into debt spirals.
In Europe, the European Central Bank (ECB) and politicians are reacting with alarm. The ECB is again buying government bonds from crisis-plagued countries, including Ireland and Portugal. European Commission President José Manuel Barroso also sent a letter to European heads of state and government in which he raised the idea of expanding the euro rescue fund, so that, in the worst case scenario, the large economies of Italy and Spain could be rescued. German Chancellor Angela Merkel and French President Nicolas Sarkozy planned to call each other by phone on Friday. In addition, Sarkozy was slated to confer with Spanish Prime Minister José Luis Rodríguez Zapatero by phone.
The political leaders and the ECB are facing a dilemma: On the one hand they have to act, but on the other they don't want to further spread panic. Merkel, for example, wants to do what she so often has done during the euro crisis -- that is, to take a wait-and-see approach. Naturally, the German government is also concerned. But the government has calculated that statements from Merkel while she is on vacation that aren't well-thought-out would only serve to heighten the nervousness on the markets. That's why Merkel was reportedly stunned when Barroso sent his letter two weeks after the recent European Union summit, and was especially shocked at how fast the letter became public.
The Chancellery and Federal Finance Ministry directly rejected Barroso's move. "Such a debate is coming at the wrong time," Vice Chancellor Philipp Rösler said. Rainer Brüderle, like Rösler a member of Merkel's coalition partner, the business-friendly Free Democratic Party (FDP), suggested that Barroso was indirectly responsible for the turbulence in the markets.
But did Barroso's letter really add to investors' fears that a rescue package would also be necessary for Italy and Spain? Or did he just tap into the already existing worries on the markets?
The ECB Dilemma
The ECB is also faced with a dilemma. In order to shore up euro-zone countries, the bank is once again buying government bonds -- a highly controversial practice that endangers the independence of the currency guardian. But it is precisely the lengthy political decision-making process which forces the ECB into the position of putting out fires.
The market ignores a simple political truth: democracies need time to make decisions. The buying of bonds is the best example. At the EU summit, the heads of state and government already decided that in the future the temporary euro rescue fund, the European Financial Stability Facility (EFSF), should purchase the bonds. But because the parliaments in several euro zone countries still have to approve the matter, the ECB will first be able to unload the unpleasant task a few months down the road.
Only a short time ago, Norbert Lammert, president of the German federal parliament, saw no reason to cut short the summer break on account of the euro crisis. But after the most recent flare-ups, Greek President Georgios Papandreou isn't quite so relaxed. Member state parliaments should quickly approve the aid, he wrote in a letter to European Commission President Barroso.
But even if EU politicians were to accelerate the approval of the new bailout package, pressure on Italy and Spain would persist because the implementation of reforms will take at least as long as the passing of the bailout itself. Italy urgently needs to improve its competitiveness, while Spain must lower its dismal unemployment rate. These are goals that can't be achieved in a few days or months -- particularly when Spain's leader is on the verge of being voted out of office and Italy has shown little motivation to manage its crisis.
Word of a surprising drop in Italian industrial production has also compounded uncertainty over whether the country's planned second-quarter economic growth of a meagher 0.3 percent is even still realistic. Meanwhile, the increasing risk premiums on Italian bond issues expose another bitter truth: The markets are always searching for an open sore.
The Limits of the Rescue Fund
Though the competencies of the EFSF were broadened at the last crisis summit, the 440-billion rescue fund was not increased, despite calls to do so. German parliamentarians were among those who spoke out against such a move.
This is precisely the weakness now being targeted by investors. The EFSF would be inadequate to address the potential needs of Italy or Spain for two reasons. First, because it is already helping other countries. And second, because such a situation would force both Italy and Spain to renege on their roles as guarantors, forcing other countries to step in and add even more funding.
Barroso wants to put a stop to such speculation with his controversial appeal to increase the EFSF. But even if it came to that, would the situation finally calm down?
That would be nice, but it would still be too early to breathe easy because the future of European crisis nations such as Greece remains uncertain. Lars Feld, the head of the economic think-tank the Walter Euken Institute, recently told the daily Süddeutsche Zeitung that by September the markets were likely to begin scrutinizing whether aid to Greece was sufficient, or if the country has gone far enough with its austerity measures.
But worries over Greece would be quickly forgotten if investors set another country in their sights. Meanwhile, the debt problems in the US are still in no way resolved. At the same time growth is stalling in the world's biggest economy, while ailing economic indicators are said to be behind the most recent stock market slide. But investors still have trust in the US economy. On Thursday they fled en masse towards government bonds.
For the time being, it is only Europe which must battle against the fears of insolvencies. And it is difficult to tell whether or not the latest round of crisis diplomacy by Europe's top politicians will quickly assuage market fears. German government sources in Berlin tried to play down expectations of Merkel's phone call with Sarkozy. The fundamental situation hasn't changed since the euro summit, government sources said. "The markets themselves will will have to repair this," they said.
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