In the white-knuckle game of chicken that the euro crisis has increasingly become, three players are staring one another down: the markets, the masses and Merkel.
As time runs out to save the shared currency and avert global economic pandemonium, the question of who will blink first is likely to become clear over the next few days while European leaders prepare for a crucial summit. All three players are refusing to budge, making it difficult to tell who will yield or whether their intransigence will result in mutually assured destruction.
On Tuesday, finance ministers from the 17 Eurozone countries agreed in Brussels on how to increase the firepower of their bailout fund and on releasing about $11 billion in emergency loans to Greece so that it can avoid bankruptcy. The meeting was a prelude to the leaders’ summit next week at which France and Germany are expected to press for rewriting the rule book in order to knit the Eurozone more tightly together, centralizing control over national budgets and finances to ensure that members of the club stick to the rules on debts and deficits.
With time running short and investors scrambling for the exits, European leaders — especially German Chancellor Angela Merkel — are under intense pressure to do more than push for stronger fire safety codes when the building is already in flames.
At the same time, angry citizens are thronging Europe’s streets to put politicians on notice of their intent to fight the harsh austerity measures that the markets and international finance officials have demanded. Governments or leaders of six European countries have fallen within the last year because of the debt crisis.
The markets, meanwhile, have turned up the heat dramatically in the last month, showing their disdain for officials’ latest crisis battle plan by rushing to unload sovereign debt and making it prohibitively expensive for governments, even those in the core of Europe, to borrow money.
At a bond auction Tuesday, Italy was forced to pay interest rates nearing 8%, about the same sky-high level that forced Greece, Ireland and Portugal to seek bailouts. Borrowing costs have also shot up for Spain, Belgium and even France.
Along with dissatisfaction, the markets have demonstrated fickleness. Investors know Italy is too big to rescue; pushing it into bankruptcy would trigger a worldwide financial calamity that would only boomerang on the investors themselves. Yet they continue to drive up Rome’s borrowing costs, even though the fundamentals of the Italian economy remain the same as they were a few months ago, when the interest rate on the country’s bonds was half what it was Tuesday.
And arguably, Italy is in a better position now to implement much-needed structural reforms under its new technocratic leader, Mario Monti, who replaced the man widely seen by the markets as an obstacle to an economic overhaul, former Prime Minister Silvio Berlusconi. The same is true in Spain, where a party committed to fiscal rigor and reform just won a landslide election.
“There are one or two positive aspects that the markets aren’t looking at right now,” said Julian Callow, chief European economist for Barclays Capital.
Instead, investor panic, in many ways self-reinforcing, has reached such a pitch that even a bond auction for Germany, the economic lodestar of Europe, had dismal results last week, despite the fact that no rational actor believes Berlin is in any danger of turning into a deadbeat nation.
Callow said the markets’ reaction is due partly to their diminished confidence that Europe can get its act together in time to resolve the debt crisis.
And that, virtually everyone agrees, comes down to Merkel, Germany’s leader.
The markets have been frustrated by her flat-out refusal to consider measures they think would at least stanch the bleeding if not heal the wound. Foremost among these are allowing the European Central Bank to buy up the bonds of troubled nations and issuing “eurobonds,” collective debt backed by all 17 Eurozone nations.
Eurobonds were reportedly on the agenda for discussion at Tuesday’s meeting of finance ministers in Brussels, but no breakthrough was announced. Officials said only that Greece would receive the rescue loans it needed to prevent a messy default and that the Eurozone would increase the firepower of its bailout fund by insuring up to 30% of government debt.
The zone will also explore the possibility of contributing more money to the International Monetary Fund, which could then be repackaged as aid to troubled euro countries such as Spain and Italy that are having difficulty raising money in the commercial markets, said Jean-Claude Juncker, the prime minister and finance minister of Luxembourg.
An idea similar to eurobonds to ease the debt crisis is to create “elite” bonds backed by the zone’s most creditworthy countries, such as Germany and Austria, to help prop up wobbly ones, though with stringent conditions attached.
But Merkel has said several times in recent days that such ideas are non-starters. She insists instead that fiscally errant countries reform their ways and is concentrating her energy on changing Eurozone treaties to allow closer fiscal union and central oversight of member nations’ budgets, even though analysts warn that the currency binding them together might implode first.
“She can be quite stubborn,” said Gerd Langguth, a political scientist at the University of Bonn and author of a biography of Merkel, Germany’s first female leader. “She always makes decisions one step at a time and doesn’t necessarily take account of the big picture.”
Merkel has refused to be cowed by the fluctuations of the markets, perhaps because Germany is in far better economic shape than its neighbors and because she thinks a bitter dose of market medicine might do wayward nations some good.
“This is about the primacy of politics. This is about the limits of the markets,” she declared last year, a view that appears to inform her refusal to back down now.
But politicians themselves are limited by their voters, and Europe’s masses have complicated attempts to put a brake on the crisis as the euro skids to the edge of the precipice.
Resistance to the harsh austerity measures prescribed by Germany, the International Monetary Fund and European Union officials is rife across the continent. As the Eurozone tips back into a possible double-dip recession, public anger is bound to rise as countries as diverse as Finland and Malta are expected to adopt a German-style model of fiscal rectitude.
Last week, Portugal was brought to a standstill by a nationwide strike, in a country where such large-scale unrest is unusual. Huge protests erupted in Italy this month over government spending reductions. Trade unions in Belgium are expected to stage demonstrations against budget cuts Friday.
Discontent is evident even outside the Eurozone: Britain, which has its own currency, is bracing for a strike by up to 2 million government workers Wednesday. George Osborne, the finance minister, acknowledged Tuesday that Britain would have to keep cutting spending until 2017 to bring down its deficit and that more state jobs would be lost, but he insisted that the country could not back away from its austerity plans.
In Greece, the epicenter of the debt crisis, yet another general strike — the 20th in less than two years — is scheduled for Thursday. Public-sector workers, angry over plans for widespread layoffs, have been staging wildcat occupations of government buildings in Athens.
“We’re entering a period of severe social unrest,” said Vassilis Xenakis, a leading member of a union representing about 750,000 civil servants. “They must realize the pain permeating society. Austerity is ripping through the social fabric of the country.”
Special correspondents Aaron Wiener in Berlin and Anthee Carassava in Athens contributed to this report.