Experts say European policy makers have more players to appease in their debt-crisis drama
The European Central Bank bought up record numbers of Spanish and Italian bonds, taking a more active -- and controversial -- role in the eurozone's debt troubles than many experts expected. The $30 billion bond purchase is expected to temporarily hold down borrowing costs for Spain and Italy -- two of the largest nations mired in Europe's debt crisis -- and help reassure global investors of the eurozone's solidarity.
While the ECB's uncharacteristically aggressive move provided evidence of its brawn -- interest rates for the two beleaguered countries eventually dropped a full percentage point after the purchase -- it also highlighted the serious challenges facing Europe's policymakers; challenges some experts say are even greater than those the United States faces.
To be sure, both the United States and Europe continue to grapple with slow economic growth, the crushing weight of enormous public debt, and austerity measures designed to trim government expenditures. Poor fiscal policy choices made leading up to the global financial crisis have been magnified as the ripple effects of the meltdown continue to radiate through markets around the world.
But many of the similarities between the two debt-ridden countries end there. "The eurozone has particular issues that have to do with the nature of the animal, that differ from the U.K. setup or the U.S. setup," says Jan Randolph, director of sovereign risk at IHS Global Insight. "It really revolves around investors concerned about whether the ECB will act as the true lender of last resort."
Whereas bond investors remain fairly confident that the central banks of the United States and United Kingdom fully back the government -- meaning that there will be enough dollars and pounds to pay investors -- the same can't be said of the eurozone. "For instance, the Bank of England will print money, and I will get paid back for my sterling gilt even if I lose money in the process [through inflation or devaluation of currency]," Randolph says. "The same cannot be said for the European Central Bank. Unlike the U.S. and the U.K., [Spain, Italy, Ireland, and Greece] can't devalue out to weaken their currency and get a bit of an external lift."
Pooled sovereignty among member countries only goes so far, Randolph says, which makes investors hesitant to invest if they aren't certain they will be repaid at least the principal of their bonds. Less demand for government bonds means higher interest rates. Higher borrowing costs could exacerbate an already dire debt situation in some eurozone countries.
The concept of Euro bonds has been discussed, but Randolph says the political unpopularity of such a move prevents serious consideration for now. Although Euro bonds might be a viable solution to debt woes, German taxpayers would likely recoil against the idea of being responsible for the debt racked up by less fiscally responsible countries such as Greece, Spain, and Italy, he says. What Europe really needs is a more muscular ECB and for monetary and fiscal policy to work in tandem.
Historically, the German Bundesbank-inspired ECB has maintained a relatively strict separation between monetary policy and fiscal policy, controlling only interest rates. However, with the latest round of bond purchases, fiscal strings were attached for Spain and Italy in the form of austerity measures.
"In the past few days, we have asked the Italian government very clearly to take a certain number of decisions ... and in particular to speed up the return to a situation of normal balance [between spending and revenue]. The same thing has been asked of the Spanish government," ECB chief Jean-Claude Trichet told the Guardian.
However, a more "normal balance" for the European Union hinges on economic growth, and the latest figures out of Europe aren't too encouraging. GDP for the 27 member countries of the EU, including the 17 that use the euro, grew at a paltry 0.2 percent quarterly rate, according to estimates from Eurostat, the EU statistics office. Even two of the stronger EU economies, Germany and France, are experiencing a slowdown, which could prolong the process of extracting the eurozone out of its financial mess.
The U.S. is slightly better situated, says Tim Hoyle, director of research at Haverford Investments. Despite the recent credit downgrade by Standard & Poor's, the U.S. dollar remains the reserve currency and treasuries continue to be considered a safe haven. But the resilience of the U.S. economic recovery hinges on growth as well. "If we can grow this economy, big debt issues become small debt issues," Hoyle says. "Europe is tackling everything through austerity because they have given up the ghost on growth. They're taking a much stricter line on austerity, [but] austerity measures don't translate into pro-growth initiatives."
In essence, the pendulum has swung severely to the other side of the spectrum in Europe, a move that could cripple prospects for growth and end up making the debt problem worse. "The U.S. is at a crossroads," Hoyle says, "If you go down that road of strict austerity, we don't grow, and if we don't grow we will never be able to handle the debt and the promises Congress has made."
- Global Health: Meaty Concerns
- Global Health: A Seminal Moment?
- Human Trafficking: The Wound That Shames Our Present
- How New Atrocity-Prevention Steps Can Work
- 9/11 Anniversary: Rethink Needed
- 9/11 Anniversary: From Empire to Decline
- 9/11 Anniversary: Scanning Bodies, Stripping Rights?
- Assassination as Foreign Policy
- Eurozone Manufacturing Slowing
- European Union Spending Cuts and Tax Hikes Hurt GDP Growth
- Who's Worse Off: Europe or the United States?
- Germany: German Tiger or European Growth Engine?
- Greece Forecasts Economic Contraction to be Worse than Expected
- Collateral Deals will Have Negative Impact on Greece
- Spain Announces Temporary Tax Cut to Stimulate New House Sales
- Eastern Mediterranean Olive Oil Producers Seek Markets in Far East
- High North: The New Frontier
- The Politics of the London Riots
- Young Westerners -- Deprived or Decadent?
- Explanations and Excuses for English Riots
- Many British Households See Steeper Rise in Debt
- Young Turks Returning Home to Chase Economic Dreams
- The Pain in Spain
- Multiculturalism and Dutch Political Culture
- Macedonia Eyes Its Future in Antiquity
- The Saudi Counterrevolution
- Libya Threatens to Become Terrorist Arms Depot
- Libya: Protection Challenge For The Opposition
- Libya After Gadhafi: Transitioning from Rebellion to Rule
- Why Are Some Progressives Gloating over Libya?
- Egypt's Reluctant Rulers
- Fear and Blogging in the Arab world
- Middle East: The Future of Women
- Middle East: Bread and Dignity
- Middle East: Palestine Towards Statehood
- Israeli - Arab Crisis Approaching
- The Upcoming Palestinian Uprising
- Israeli Settlements Keep Middle East Unsettled
- Syrian Opposition Tries to Unite
- Assad Rejects International Calls to Resign
- Obama Calls for Syrian President Assad to Step Down
- Cranking up Pressure on Syria
- Violence in Iraq Raises Questions About American Withdrawal
- Egypt's Brotherhood Declares War on the Bikini
- Labor Pains in Saudi Arabia as Hiring Deadline Nears
- Gulf Markets Worry About Oil Outlook
- Jordanian King Promises Reform to Skeptical Public
- China and the United States' Debt
- China's New Aircraft Carrier Bolsters Its Regional Reach
- China Outpaces United States in PC Market
- Moody's Downgrades Japan Credit Rating Over Deficit Concerns
- Kim Jong-Il Pushes China for New Nuclear Talks
- North Korea's Rare Pledge to Abandon Nuclear Activities
- Indonesia: Pluralism vs Vigilantism
- South Sudan: Labor Pains
- Somalia: Pro-government Rally Held in Mogadishu
- Kenya: 'Perfect Storm' Brewing Among Urban Poor
- Latin America's Security Dilemma
- A President-for-Life in Argentina? Not Likely
- There's Hope for Mexico and Central America
- Chile: The Fight to Make Education a Guaranteed Right
- Death of Layton Poses Challenge for NDP Interim Leader
- Global Economic Downturn: A Crisis of Political Economy
- Crisis of Confidence: Debt Debate Erodes US Global Standing
- United States Debt Downgrade Won't Have Much Short-Term Effect on Foreign Policy
- The Empathy Deficit
- Stiglitz Upbeat About China and Latin America
- China Trade Surplus Rises
- China Sees Inflation Rate Hit 6.5%
- Latin America Not Immune to U.S. Debt Deal
- Is Japan Now a Good Bet?
- Is Germany the New Safe Haven?
- Islam and Arab Political Change
- Iran Reshaping Persian Gulf Politics
- Diplomatic Pressure on Al-Assad Gaining Momentum
- Arab Nations Join Call For Al Assad To Stop Civilian Attacks
- Bahrain and Kuwait recall Syria envoys
- Clinton Says Syrian Government has Lost Legitimacy
- September Looms Large in Israeli-Palestinian Conflict
- Israel's Growing Wealth Gap Fuels Economic Anger
- Israel and Cyprus Forging Ahead on Gas Bonanza
- Major Israeli Defense Merger Dropped
- Israel Approves 1,600 Settler Homes in East Jerusalem
- Mini UAV Chopper For Urban Warfare Revealed
- Roman-era Sword Uncovered in Ancient Ditch in Jerusalem
- Hamas: Palestinian Authority is Clamping Down On Our Preachers
- Warnings of 'Somalization' And All Out Civil War in Yemen
- Missing Out on Vital Medicines Because of Economic Crisis
- Jordanians Lash Out Against Planned Nuclear Reactor
- Jordanian Mosque Named After Jesus
- Troop Withdrawal Rests on Decision From Iraq
- Somali Forces and African Union Peacekeepers Gradually Expand Control In Mogadishu
- Somali President: Combat Operations Against Al-Shabaab Will Continue
- Al-Shabab Pullout: The Beginning Of The End in Somalia?
- Africa: Tough Choices As Food Prices Continue To Rise
- Nigeria: Jail Threat for Polio Vaccination Refuseniks
- Congo: Implement Anti-Discrimination Law, Urge Indigenous Peoples
- Congo: High-Tech Measures To Curb Illegal Fishing In Congo
- Raw Sewage Kills in Madagascar
- Tanzania: Violence Against Children Rampant
- Maternal Deaths Quadruple In South Africa
- United States and Pakistan Navigate New Tensions in Fraught Relationship
- Pakistan's Forgotten 2005 Quake Victims Still Need Help
- China Announces Sea Trial Of Its First Aircraft Carrier
- Indonesia's Global Significance
- Seoul Blasts Pyongyang For Fabricating Shelling Incident
- North Korea Planned Assassination of South Korean Defense Minister
- Calls For End To Torture and Extrajudicial Killings By Bangladeshi Police
- Muslim Rebels Seek Substate In Philippines
- DOJ Places Former Philippine President On Immigration Watchlist
- Britain Sticks With Austerity Plan
- Cameron Announces Crackdown On Facemasks
- Norway: The Sky Is Weeping
- Norway Attacks a Tragic Result of Failed Immigration Policies
- Norway: Blaming the Muslims
- Norway: Breivik's Real Enemy: Himself
- Brazil Joins Race for Globalized Students
- OAS Is a Basket Case - but a Needed One
Available at Amazon.com:
Copyright 2011, U.S. News & World Report