By LIZ ALDERMAN
Times Roundtable on the Week's Economic NewsHis remarks, which angered German policy makers, were one of the catalysts for the markets’ downward spiral Thursday, along with a half-hearted attempt by the European Central Bank to bolster the bonds of the most deeply troubled debtors.
Published: August 5, 2011
PARIS — As European leaders on Friday tried to calm fears that the region’s sovereign debt problems were spinning beyond politicians’ control, Italy’s prime minister said finance ministers from the Group of 7 industrial nations would meet “within days” to discuss the volatile financial crisis.
Andrew Medichini/Associated Press
Italy's prime minister, Silvio Berlusconi, right, and the country's economy minister, Giulio Tremonti. "We have to recognize that the world has entered a global financial crisis that concerns all countries," Mr. Berlusconi said Friday.
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Times Roundtable on the Week's Economic News
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Tony Gentile/Reuters
A woman shopping in Rome. Italy is in an economic slump and is trying to restore the confidence of investors and creditors.
The Italian prime minister, Silvio Berlusconi, whose nation has been viewed as the next potential debt-laden domino to fall, also announced a number of measures Italy would take to restore the confidence of investors and creditors.
The G-7 meeting is meant to show that leaders are taking action to address the crisis, even before votes occur in national parliaments next month to expand Europe’s rescue fund for its most financially troubled members.
While no details of the meeting’s agenda were given, the situation “requires coordinated action,” Mr. Berlusconi said. “We have to recognize that the world has entered a global financial crisis that concerns all countries.”
For all the hum of activity on Friday, though, many economists and analysts remained unconvinced that sufficient steps were being taken to resolve the problems engulfing the European nations that share the euro.
European stocks were down for a second consecutive day on Friday, on the gnawing realization that Europe and the United States may face fundamental economic problems for years to come.
The turmoil prompted a flurry of phone calls between President Nicolas Sarkozy of France from his vacation retreat on the French Riviera, and Chancellor Angela Merkel of Germany, who had chosen an August getaway to Italy. Mrs. Merkel and Mr. Sarkozy also each spoke with President Obama on Friday, the White House said, but offered no details on their discussions.
Mr. Berlusconi, meanwhile, spoke by phone Friday with Mrs. Merkel and, separately, with Herman Van Rompuy, the European Council president, and with José Luis Rodríguez Zapatero of Spain — the other big debt-saddled European country that, like Italy, is seen as teetering.
Mr. Zapatero of Spain, whose economy is in greater peril as investors drive up borrowing costs, also spoke separately to both Mr. Sarkozy and Mrs. Merkel from his vacation in Andalucia.
At a hastily called news conference, Mr. Berlusconi, who has been criticized for being too slow to recognize that Italy’s debt problems threaten the euro union, said his country would take various steps to address the crisis.
He said Italy would aim for a balanced budget a year earlier than a previously stated 2013 deadline, seek a constitutional balanced-budget amendment and make other moves to liberalize the nation’s economy — which is so sclerotic from bureaucratic rules that it has barely grown for a decade.
Parliament may shorten its August recess to pass the measures, Mr. Berlusconi said. He appeared alongside the economy minister, Giulio Tremonti, whom Mr. Berlusconi had recently treated with public disdain that added to the market’s concerns about Italy.
Many analysts remain skeptical that European leaders have grasped the problems confronting them.
“Politicians have done everything to demonstrate they are not ahead of the curve,” said Stefan Schneider, the chief international economist at Deutsche Bank in Frankfurt. “That is hitting market confidence and creating a self-fulfilling feedback loop.”
Just days after Washington struck a harrowing, last-minute deal to lift America’s debt ceiling, a stark reality has come crashing in on both sides of the Atlantic. Neither the United States nor Europe has yet fully recovered from the financial crisis that spread from spring 2007 through early 2009.
Instead, brief bright spots of recovery have been overshadowed by rising unemployment and anemic economies, especially as debt-reduction austerity programs in Europe and spending cuts in the United States weigh on growth.
Signs of economic weakness continue to emerge. New data indicates that industrial output fell in June in Italy and Spain, and both economies grew at a tepid pace in the second quarter. While the German economy remained strong, industrial production there slid in June, by 1.1 percent, as construction activity also slackened.
Meanwhile, leaders in Brussels on Friday were trying undo the damage wrought by José Manuel Barroso, the European Commission president, a day after he frightened investors by conceding that Europe was gripped by political paralysis.
Many analysts say that the inability of politicians to speak with a unified voice, whether about the debt ceiling in the United States or the debt crisis threatening the foundations of the euro monetary union itself, is at the heart of these problems.
China, whose surging growth depends on the West, voiced new worries Friday about the declining fortunes of its two largest trading partners.
“Europe’s debt problems are still developing, and the U.S. sovereign debt default risk is escalating,” China’s foreign minister, Yang Jiechi, said during a visit to Poland. He urged all countries to “further increase communication and coordination.”
Europe’s leaders seemed to take the hint — for now.
“All of us who are in responsible positions in Europe will have to do much better in order to ensure verbal discipline and rigor,” Ollie Rehn, the European economics commissioner, said at a hastily called news conference in Brussels on Friday.
European officials, he said, were “working night and day to put flesh on the bones” of an agreement in principle they struck in July for a second bailout of Greece and to reinforce its sovereign rescue fund, the European Financial Stability Facility. The fund is supposed to keep the economies of Italy and Spain from succumbing to market attacks the way Greece, Ireland and Portugal did.
“Once investors understand that all this work is under way behind the scenes, they will be reassured,” Mr. Rehn said. “It is not as if the fundamentals of the Italian or Spanish economies have changed overnight.”
That may be. But with Greece, Ireland and Portugal having received an unprecedented bailout from their European partners, investors are now wary of any country with low growth and high debt — like Spain and Italy, with their much larger economies.
European parliaments are scheduled to vote on expanding the capacity and scope of the rescue fund after their vacations. But the worry is that financial markets will not wait that long, and will drive up borrowing costs for Italy and Spain to levels that will make it much harder for them to maintain a sustainable debt load.
“If they had agreed on those measures nine months ago it would have prevented the crisis from spiraling to this extent,” said Simon Tilford, the chief economist at the Center for European Reform in London. “But this is too little too late.”
For all their declarations, Europe’s leaders are still not taking the ultimate step that many analysts say would shore up the euro union: moving toward greater fiscal federalism, a system that would make Europe look more like the United States.
The reasons for resisting are deep-seated: No country wants to give up its sovereignty. Even discussions about issuing euro bonds are met with fierce resistance in Germany, as are ideas for a pan-European financial regulator and Europe-wide deposit insurance to guard against instability in the region’s banks.
Germany warned Friday that it would oppose any plan to introduce euro bonds. Joachim Pfeiffer, a lawmaker and economics spokesman for Mrs. Merkel’s parliamentary bloc, called them “poison.”
Another move that critics say would stem the crisis would be for the central bank to buy Italian and Spanish bonds, which would keep their rates from spiraling to the levels that forced Greece and others to take a bailout. But the central bank sees this as a weapon of last resort and is loath to use it.
Mr. Sarkozy has something else to fear. If the crises in Italy and Spain cannot be tamed, France, as one of the major contributors to the cleanup operation, would be in an increasingly weak position.
Spreads on benchmark French bonds have widened against ultrasafe German bonds. And while growth is not lagging, France’s structural deficit is high. If the size of the rescue fund were to increase enough to protect Spain and Italy, investors might start to look askance at France’s ability to underwrite its share, analysts said.
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