Europe’s financial woes aggravated by U.S. plunge

After 21 months of battling to deal with their own economic problems, Europeans watched Monday as their financial woes at home were aggravated by trouble from abroad.

The aftershock from the downgrading of America’s credit rating Friday sent the continent’s stock markets tumbling, despite hints that the bad news from the other side of the Atlantic may have begun to galvanize Europe’s dithering leaders into concerted action.

After a series of late night negotiations over the weekend, the European Central Bank made good Monday on its promise to begin buying bonds of Spain and Italy, big economies whose debt levels have prompted growing questions. The intervention followed promises by the two countries to wrestle their budgets into shape and appeared to buy them some breathing room amid the pressure of financial markets.

But many observers said the central bank would have to sustain its bond-buying if it hoped to keep the markets calm.

Meanwhile, concern that the U.S. woes would compound problems for the troubled European economies sent stock markets down.

Renaud Murail, an executive with Barclays Bourse, said events on both sides of the Atlantic had created a “scenario of discouragement.”

“Investors are getting the impression more and more that we’re going beyond a financial crisis and into a systemic risk,” he told journalists. “That’s what is keeping the wind of panic blowing over the markets.”

Until now, the European Central Bank has been reluctant to become directly involved in Europe’s economic crisis, preferring to push member states to put their own finances in order, and for European countries to find cash for an “emergency fund” to help ailing members.

The propping up of Spain and Italy came after Jean-Claude Trichet, head of the ECB, forced through an agreement in emergency talks with the bank’s council late Sunday. The move had been opposed by Germany’s powerful Bundesbank.

Tobias Blattner, a former economist at the ECB, said the bank’s intervention had done little to help the crisis of confidence gripping the stock markets.

“This reflects the fundamentals that growth is in a very bad situation on both sides of the Atlantic and this is why the ECB’s interventions will not change anything,” he told the BBC.

A promise from Italian Prime Minister Silvio Berlusconi to balance the country’s books by 2013, a year earlier than expected, and similar plans from Spain have been received with general skepticism.

“Markets still think there is a lot of talk from politicians but not much action,” said David Jones, an analyst at the spread betting firm IG Index.

Some analysts even feared the credit ratings firms may now turn their attention to other Eurozone members. France and Germany, who have had trouble settling on a coordinated response to the crisis, issued a statement that they were committed to shoring up member states in difficulty under “exceptional circumstances.”

There is a general feeling that Europe has been lurching from crisis to crisis for nearly two years. Last month, European leaders stepped in at the eleventh hour with an emergency package to rescue debt-laden Greece for the second time, having also propped up Italy and Portugal. Now, with the much bigger economies of Spain and Italy teetering, the question was whether Europe as a whole had the financial clout — or the political will — to lift the continent out of its gloomy prospects.

“August is going to be a long and painful month,” said one economist who declined to be named because he was not authorized by his company to speak to reporters. “At the moment, the markets don’t seem at all convinced by the meetings and announcements.”

Willsher is a special correspondent.