As long as the patients were South 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 should 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 credit-worthy France are finding it much more expensive to borrow money in the open market, compared with Germany. 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.
As France’s borrowing costs become increasingly divergent from Germany’s, so might its attitude toward E.C.B. lending.
On Wednesday, Chancellor Angela Merkel of Germany continued to speak out against E.C.B. bond buying, while the French finance minister, François Baroin, was arguing just the opposite.
Mr. Baroin called for the support of all European institutions, including the E.C.B., 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.
On Wednesday, the so-called yield gap — the premium that investors demand for holding French 10-year government bonds, rather than German ones — rose to a new euro-era high 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 beleagured Italy has with Germany, but it is a disturbing new trend for France. Austria and Netherlands are also experiencing widening yield gaps with Germany.
Mr. Baroin’s remark was a reference to Germany’s deep-seated fears over the inflation that could result from the E.C.B.’s pumping more money into the region’s economies.
Italy continues to be a major source of bond-market jitters, despite the announcement Wednesday by its new prime minister, Mario Monti, of a new cabinet in which he named himself finance minister and brought in a number of academics and people from the banking industry and the upper reaches of the civil service.
Italian 10-year yields were back to nearly 7 percent Wednesday, the level at which analysts say financing the country’s €1.8 trillion, or $2.4 trillion, debt mountain becomes unsustainable.
But the market anxiety has moved well beyond Italy, as the specter of a regionwide recession is making investors realize that if every country is tightening its belt at the same time, few will be able to grow their way out of the problems any time soon.
So far, France, the Netherlands and Austria have been among Germany’s allies in the crisis. France, eager to show that the French-German axis is thriving, has even backed Germany’s stance on E.C.B. lending. The question now, though, is whether other countries will start to resist Germany’s policy prescriptions.
“The Germans have been able to rely on the French, the Dutch and the Austrians,” said Simon Tilford, the chief economist at the Center for European Reform in London. “But if they get dragged into this and their borrowing costs continue to rise, that could influence whether they continue to back Germany and the line taken on the euro zone crisis.”
On Wednesday, the French government showed a clear sign of divergence. It called on the E.C.B. to help calm the crisis by buying the bonds of Italy, Greece and other governments whose borrowing costs are surging. The E.C.B., in fact, has already been doing that, but at modest levels that seem to be having little impact.
“The E.C.B.’s role is to ensure the stability of the euro, but also the financial stability of Europe,” Valérie Pécresse, the French budget minister, said Wednesday. “We trust that the E.C.B. will take the necessary measures to ensure financial stability in Europe.”
Article source: http://www.nytimes.com/2011/11/17/business/global/germanys-bitter-recipe-tests-euro-zones-solidarity.html?partner=rss&emc=rss
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