From THE WASHINGTON POST
U.S. and European officials, who just weeks ago seemed to be getting a handle on the euro zone’s financial crisis, are now scrambling to prevent a new round of problems from pulling down some of Europe’s largest economies.
European Central Bank President Mario Draghi warned in Brussels on Thursday that he considered the euro zone’s current structure “unsustainable,” and said the region’s governments must surrender far more budget and regulatory power to a central authority if the currency union is to be saved.
His comments — and an intense week of high-level lobbying by U.S. officials — come amid a worldwide swoon on stock markets, a flight by investors to the safe haven of U.S. and German bonds, and a growing concern that problems in Spain’s banking sector may force the euro zone’s fourth-largest economy to seek a costly bailout. Major U.S. stock market indexes were down 6 percent in May and the euro is trading near a two-year low against the dollar.
A top U.S. Treasury official traveled to Europe this week to press leaders for faster action. And President Obama conferred with European leaders by phone this week about how to contain a two-year-old crisis that may be reaching a dangerous denouement.
A developing recession in Europe is part of the reason for the renewed sense of tension. The economies of major nations including Italy and Spain are shrinking, while France’s has stagnated. The
economy could be losing steam as well. With economic activity in China slowing, authorities there have recently tried to give it a boost by increasing government spending. As the global recovery stalls, crude oil prices have fallen 20 percent in the past two months.
On Friday, the U.S. Labor Department will release its monthly employment report, offering evidence of whether the American economy is continuing to buck the global slowdown or is being held back by global trends.
A sense of political drift in Europe, meanwhile, is taking hold. This is reigniting concern that the euro region’s leaders may not act fast enough to prevent investors from abandoning countries such as Spain and Italy for fear they may default on their bonds or, more dramatically, drop the euro.
Political uncertainty has been stoked by the current political stalemate in Greece. With its leading political parties deadlocked ahead of June 17 elections, the country’s current bailout program is being pushed off track, raising the risk that Greece may become the first country to exit the euro and fracture the euro currency union.
New leaders in Spain, Italy and, more recently, France, meanwhile, are pressuring German Chancellor Angela Merkel to put even more of her country’s financial weight behind measures needed to prop up weakened European governments and banks.
The debate is increasingly focused on the possibility that the Spanish government may not be able to afford the costs of a banking-system rescue.
In recent weeks, European officials, the International Monetary Fund and others have urged that an existing European bailout fund be used to pump money directly into Spanish banks. At the moment, the Spanish government would have to borrow money to bail out the banks, and this would increase its own debt, aggravating concerns about Spain’s financial health.
German officials are opposed to providing the bailout fund with the flexibility to help banks directly.
In Brussels on Thursday, Mario Monti, Italy’s prime minister, said Germany was putting the goal of a more integrated Europe at risk by its “lack of promptness” in accepting the change.
Draghi, a critical voice in the discussion as head of the central bank used by the 17 nations, said Europe needed to do more to back its banking system. At the same time, he criticized the slow response of Spanish officials in dealing with their banking crisis.
Spain’s recent nationalization of Bankia, a large conglomeration of savings institutions, will cost the government an estimated $24 billion. But the total amount Spain needs to prop up its banks is still unknown. The figure is difficult to estimate because recession and falling property values are leaving banks saddled with larger and larger amounts of bad debt.
This uncertainty — and the prospect that the Spanish government may have to raise money to rescue its banks — are unnerving global investors. The interest rates on Spanish bonds have been on the rise as the government is forced to pay a higher cost to borrow money.
This perilous dynamic in the banking sector, reminiscent of the problems that forced Ireland to seek a bailout in 2010, is raising the possibility that Spain may also need international help.
After a meeting with Spain’s vice president on Thursday, the International Monetary Fund managing director, Christine Lagarde, said the IMF had not received a request for help and was not working on a plan for Spain.