Germany should know better after what happened to the Weimar Republic. Meanwhile, the ECB has been fighting inflation for the past two years even as the continent so its growth slowing. Fortunately, there is a new head of the ECB and he immediately to lower rates.
Widening Split in Europe on the Virtue of Austerity
By LIZ ALDERMAN and GRAHAM BOWLEY Published: November 16, 2011
PARIS — Throughout Europe’s long debt crisis, Germany has prescribed the same strong remedy to its troubled neighbors: a stiff dose of fiscal discipline.
As long as the patients were southern European countries like Greece and Italy, seen as victims of an unhealthy lifestyle, northern-tier nations like France, Austria and the Netherlands have been willing to go along with Germany’s prescriptions for reducing debt in the name of economic health. And they were willing to support Germany’s insistence that the European Central Bank not be a lender of last resort to indebted governments by actively buying their bonds.
But suddenly, as investors’ fears mount that many euro area nations are about to tip into recession, even countries like creditworthy France are finding it much more expensive to borrow money in the open market. And with that development comes a dawning realization: that austerity, rather than making it easier for them to pay down their higher debts, could make it harder — and more expensive.
The exposure of the United States, and in particular its banks, to Europe’s debt problems caused a sharp sell-off in stocks Wednesday in the final two hours of trading. The Standard & Poor’s 500-stock index, flat on the day by about 2 p.m., lost 20.9 points, or 1.66 percent, to close at 1,236.91, after the rating agency Fitch warned that United States banks were vulnerable if Europe did not solve its crisis quickly.
As investors worried about the European sovereign debt held by banks and their vulnerability to stress in the European financial system, bank shares led the declines. Goldman Sachs lost 4 percent to $95.50. Morgan Stanley closed down 8 percent at $14.66. Citigroup lost about 4 percent to $26.90.
“All this underscores the ongoing nervousness about Europe generally and the banking sector specifically,” said Barry Knapp, head of American equity strategy at Barclays Capital.
In Europe, as France’s borrowing costs become increasingly divergent from Germany’s, so might its attitude toward having the European Central Bank step in. Already, French officials are openly disagreeing with Germany on the policy.
On Wednesday, Chancellor Angela Merkel of Germany continued to speak out against the idea of the central bank buying bonds, while the French finance minister, François Baroin, was arguing just the opposite.
Mr. Baroin called for the support of all European institutions, including the central bank, to respond to the crisis. “But Germany, for historic reasons, has closed the door to the direct involvement of the E.C.B.,” Mr. Baroin said in an interview with the French business newspaper Les Échos.
Mr. Baroin’s remark was a reference to Germany’s deep-seated fears over the inflation that could result if the central bank pumped more money into the region’s economies.
The so-called yield gap — the premium that investors demand for holding French 10-year government bonds, rather than German ones — rose Wednesday to a new high since the euro began of nearly two percentage points. It later eased back somewhat, to 1.9 percentage points.
That is still not close to the yield gap of nearly 5.2 percentage points that beleaguered Italy has with Germany, but it is a disturbing new trend for France. Austria and Netherlands are also experiencing widening yield gaps with Germany, and Spain has become a new source for concern.
The central bank was more aggressively in the market buying the bonds of Italy and Spain on Wednesday to stabilize the situation, traders said. It bought about 146 million euros, more than the 28 million euros it had bought over the previous two days, according to TD Securities. That helped lower yields earlier, but the effect didn’t last and interest rates rose again later.
In Spain, which holds elections this weekend, the 10-year yield rose to 6.4 percent — up from 5 percent just five weeks ago, and back to the levels that first prompted the central bank to begin its current relatively low-level bond buying program in the summer.
In its warning, Fitch said United States banks “could be greatly affected if contagion continues to spread beyond the stressed European markets.” The banks’ exposure to European countries’ debt and to European banks was “sizable” then “unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken.”
Another agency, Moody’s, downgraded several German lenders, adding to investors’ jitters.
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