In Europe debt crisis, dire problems even in solutions

LONDON — Eighteen months into a sovereign debt crisis — and after many futile efforts to resolve it — the endgame appears to be fast approaching for Europe.

While its leaders may well hold to the current path of offering piecemeal solutions, nervous investors are fleeing European countries and banks.

Two main options exist: Either the eurozone splits apart or it binds closer together.

Each of these paths — Greece, and possibly others, dropping the euro or the emergence of a deeper political union in which a federal Europe takes control of national budgets — would lead to serious political, legal and financial consequences.

But with financial panic now threatening to move from Italy and Spain to Belgium, France and even Germany, the eurozone's paymaster, the pressure upon Europe to arrive at a solution has reached its most intense point yet.

Even the British satirical weekly, Private Eye, has weighed in, proposing last week that the answer was for Europe itself to leave the European Union.

Underlying these scenarios however, from the absurd to the less so, has been Europe's persistent inability to rectify the central conundrum of its common currency project: how to get money from the few countries that have it, mainly Germany and the Netherlands, to the many that need it — Greece, Italy, Spain, Portugal, Ireland and perhaps even France.

In recent days, eurozone leaders have been pursuing a deal that would institute strict new budget rules while avoiding the need to rewrite existing treaties.

The consequences for continued inaction are dire. Uncertainty and austerity have killed the eurozone's growth prospects and analysts now expect the euro area's economy to shrink by 0.2 percent next year — a blow for the many U.S. companies that export there.

U.S. financial institutions are also at risk. According to the Institute of International Finance, U.S. financial institutions have $767 billion worth of exposure via bonds, credit derivatives and other guarantees to private and public sector borrowers in the eurozone's weakest economies.

And as the European Central Bank continues to hold back from printing money as its counterparts in the United States and Britain have done, investors now see a much higher likelihood of a broad market crash and a worldwide recession.

Such anxieties were on display last week when Vitor Constancio, the vice president of the ECB, gave a speech to investors in London.

It was billed as an address on the international monetary system, but, given the circumstances, there was little interest from investors in Constancio's views regarding fixed versus floating exchange rates and quite a lot in terms of what steps the ECB might take to address the crisis.

One somewhat frantic investment banker noted that beyond the Italians and the Spanish, even the Germans were having problems selling their bonds. What, he asked, was the European Central Bank going to do about it?

Constancio mentioned the bank's bond-buying program and making loans available to banks, but he was blunt in saying that unless countries like Greece and Italy followed treaty rules and reduced their budget deficits, there was not much he could do.

"The countries must deliver," said Constancio, a former governor of the Portuguese central bank. "In the end it is governments that are responsible for the euro area — it is not just the ECB."

But it is this eat-your-spinach policy approach that many analysts are now saying is making the situation worse as countries throughout the euro area — including even Germany, the region's economic locomotive — cut spending and raise taxes to meet budget deficit targets.