The World from Berlin 'The Euro Zone Has Been Inviting Speculation'

The financial markets are unimpressed by euro-zone leaders' dithering on approving a new bailout for Greece. German commentators say the time has come for decisive action by the EU -- especially now that Italy's finances are looking shaky too.
A man leaves the Milan stock exchange on Tuesday: Is the only way for Italy down?

A man leaves the Milan stock exchange on Tuesday: Is the only way for Italy down?


The euro crisis appears to have entered a turbulent new phase, as the European Union hesitates on approving a second bailout for Greece  and the risk of contagion seems ever larger.

Italy  has slid into speculators' crosshairs this week amid fears that its debt mountain, equivalent to 120 percent of its gross domestic product, has grown too big to handle. Observers say the country -- the third-largest economy in the euro zone -- is too big to be bailed out. On top of that, the rating agency Moody's has now downgraded Ireland's debt  to junk status, following its downgrade of Portugal last week.

It seems that the time has come for decisive action on the part of Europe's leaders. But precisely that is missing, as EU leaders prevaricate on passing a second rescue package for Greece. A meeting of the Euro Group of euro-zone finance ministers on Monday failed to produce much in the way of concrete results.

The markets are reacting nervously to the uncertainty. The euro fell to its lowest level against the dollar in four months, and Italian stocks have taken a beating. The country's main share index fell by as much as 4 percent on Tuesday before recovering.

Rumors of a Special EU Summit

German Finance Minister Wolfgang Schäuble said on Tuesday evening that it might be necessary for EU heads of state and government to meet at a special summit in order to give markets the confidence that the crisis can be overcome. The news agency Reuters quoted diplomatic sources in Brussels saying that planning had begun for a special summit this week. A spokeswoman for the German government told Reuters on Wednesday, however, that there were no such plans, explaining that euro-zone finance ministers first had to approve a new rescue package for Greece.

In a television interview on Tuesday evening, Schäuble insisted that the EU was on the correct path to stemming the debt crisis. At their meeting in Brussels, the euro-zone finance ministers had "put everything into motion that is necessary in this case," he said. "We will use all the instruments that are possible" to improve Greece's ability to support its debt, he said. Schäuble also said that concerns about Italy were "completely unfounded."

On Wednesday, the Financial Times Deutschland reported that the euro-zone members were planning to support a radical program whereby Greece would buy back its own sovereign bonds. According to the newspaper, the money to buy back the bonds would come from the euro rescue fund, the EFSF. The bonds would be bought back for an average price of 50 percent of their nominal value, which would be equivalent to a "haircut" on Greek debt.

Writers commenting on the crisis in the Wednesday editions of Germany's main newspapers argue that the time has come for decisive action. One writer even suggests that European leaders should cancel their summer vacations to get the crisis under control.

The center-right Frankfurter Allgemeine Zeitung writes:

"First Greece, then Ireland, then Portugal -- and now perhaps even Italy and Spain? Will these two big countries have to get help from the EU's rescue fund, because their debt is getting out of hand and nobody believes their governments when they insist they are consolidating their finances? The markets and politicians are reacting hyper-nervously, because they no longer consider the risk of contagion to be abstract, but completely real."

"If it comes to that, then what began as a sovereign debt crisis in Greece will have wreaked maximum havoc. In the case of Italy, for the first time a country would be affected that is a founding member of the EU, a member of the G-8 and one of the world's major economies. One can hardly imagine what it would be like. Then we would really have a big crisis."

The center-left Süddeutsche Zeitung writes:

"The situation is serious, there's no doubt about that. Italy has accumulated the highest level of debt (in the euro zone) after Greece. … Nevertheless, the greatest danger does not lie in Italy's real economic situation. It consists of the fact that international investors have made the country into their next target, and European governments have reacted in panic. Italy is not the next Greece. The situation is in many ways better in Italy than in the country that triggered the euro crisis."

"European leaders should meet at a special summit on Friday and declare that they are absolutely prepared to supply Italy with new loans. This will reduce uncertainty on the market and leave speculators without a leg to stand on."

"What would be the alternative to a grand solution for the euro crisis? It would be further delay and last-minute emergency operations. Italy could soon come under such attack that its debts become unaffordable. Europe could no longer finance such a burden -- Italy is simply too large. Then the euro would really be finished."

The business daily Handelsblatt writes:

"Rather than curb speculation, the euro-zone finance ministers have been downright inviting it. The markets now know less than ever about how the political leadership of the monetary union plans to deal with the Greek crisis. After the meeting of the Euro Group on Monday, there are more unanswered questions than before. Will Greece soon buy its own bonds back? Will the euro rescue fund EFSF be increased again? Should the euro zone offer Greece, Portugal and Ireland better conditions for their loans? Will the new rescue package for Greece be ready in one or two weeks, or perhaps only in five or six? What form will the involvement of private creditors take?"

"There were no answers to these questions on Tuesday from Euro Group head Jean-Claude Juncker or German Finance Minister Wolfgang Schäuble. When there is so much fog about, it shouldn't be surprising if the financial markets are disoriented."

The conservative Die Welt writes:

"The fact that important European leaders have still not realized the full extent of the problem is having a catastrophic effect. Chancellor Angela Merkel, for example, temporarily neglected the euro crisis for weeks and focused on the so-called energy revolution, which could easily have waited another month or two. And now, when things are heating up because Italy is under pressure, Merkel has gone to Africa. As an economic powerhouse, Germany profits from the euro zone more than any other country. But Merkel is visiting Kenya, Angola and Nigeria rather than taking the lead in Europe and saving our domestic market."

"One can only hope that the powerful turbulence on the capital markets has woken up the chancellor and her colleagues. It will take more to get this crisis under control than a decision by euro-zone finance ministers to approve the new euro rescue package. … Instead of disappearing for their summer vacation, Europe's leaders must now sit down and negotiate -- and not only next weekend, but until they have found a convincing result and have regained their ability to take action."

The Financial Times Deutschland writes:

"The European sovereign debt crisis reminds one of Hans Christian Andersen's fairy tale 'The Emperor's New Clothes.' Everyone can see that Greece is bankrupt. Of course, nobody is saying that out loud. But in contrast to Andersen's story, many have at least admitted that the emperor has a serious problem. We admit that his clothes are torn. We sew a patch onto his naked leg, cover him up with a big towel and announce that we will help him. But naked -- no, he's not naked. Why don't we want to admit it? Because everyone would immediately realize that it's not just the emperor who is naked, but a whole host of other leaders as well."

-- David Gordon Smith
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