Turbulence in Markets Casts Pall over Summit ; Divisions among Leaders Add to Fears of Another European Economic Crisis

By Jim Yardley; Jack Ewing | International New York Times, October 17, 2014 | Go to article overview

Turbulence in Markets Casts Pall over Summit ; Divisions among Leaders Add to Fears of Another European Economic Crisis


Jim Yardley; Jack Ewing, International New York Times


Concern that Europe's economy is edging toward a new crisis that again could ripple across the world was apparent as European and Asian leaders held talks in Milan.

With leaders from Europe and Asia gathered here to talk shop on everything from climate change to the Ebola virus to the crisis in Ukraine, the issue that is forcing itself back to the fore is the suddenly worrisome prospect of a revived European economic crisis bringing consequences that could again ripple across the globe.

One after another, European leaders arrived at the summit meeting in Milan, smiling in photo ops despite gloomy financial news on Thursday that sent stock markets tumbling and borrowing costs shooting up, especially in Greece, evoking memories of the euro crisis two years ago, and aggravating divisions within the European Union over the remedy.

With growth across much of Europe at a standstill, France, Italy and the European Central Bank have steadily coalesced into a bloc against Chancellor Angela Merkel of Germany and her insistence on austerity. The divisions between Europe's leaders, at a moment when unity would seem critical, is one reason the markets are rattled -- as well as the fact that policy makers still have not found a tool to revive growth in the face of staggering public debt.

"We need to show that Europe is capable of investing in growth, and not only in rigor and austerity," said Prime Minister Matteo Renzi of Italy, speaking to reporters outside the conference center after presiding over the opening of the meeting. He described the international financial situation as "very delicate" and said Europe had still not earned the confidence of international markets.

"As the I.M.F. has said," he stated, referring to the International Monetary Fund, "we need to focus on growth."

The prospect of another European financial crisis can only bring an unwanted sense of deja vu for Washington and the rest of the world, given that China's economy is slowing, the American recovery remains fragile and the Ukrainian crisis remains unresolved. Financial investors who had seemingly forgotten about the European crises in 2008 and 2010 now again seem worried about the Continent's persistent lack of growth and the prospect of falling into a deflationary trap.

"It is the third phase of the crisis," said Francois Godemont, an analyst at the European Council on Foreign Relations. Politically and economically, Europe's central country remains Germany and its central figure remains Ms. Merkel. Germany is the eurozone's biggest economic force but is now stumbling -- even as its role as enforcer of austerity has made it a focus of fear, loathing and blame from some other European powers.

France, which has always been Germany's indispensable partner in European crisis management, is now in near revolt. French leaders, staring at a deepening economic malaise, are threatening to violate European Union budget restrictions and increase debt levels in order to stimulate growth. In Italy, Mr. Renzi has promised to meet the bloc's debt targets, yet he has allied with President Francois Hollande of France to push for a pro-growth agenda.

Mario Draghi, the president of the European Central Bank, has pressed Germany to temper its insistence on budget discipline and to spend more on public works to stimulate the eurozone economy. The French have cheered him on. German leaders have resisted, while making clear their opposition to the more powerful stimulus measures that analysts expect the E.C.B. to deploy soon.

The political standoff has rattled international investors, who fear that European leaders are farther apart than ever on how to pull the region's economy out of its long slump -- and that the European Central Bank will not have the freedom it needs to take the extraordinary measures needed to stave off another crisis.

"German resistance against the E.C.B. pursuing more aggressive policy is one of the things spooking markets," said Holger Schmieding, chief economist in London at Berenberg, a German bank. …

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