Euro Zone Nears Moment of Truth on Staying Together
As Spain’s economic crisis deepens and uncertainty swirls over Greece’s future in the euro zone, the guardians of the increasingly fragile European monetary union are near a moment of truth: Can they muster the will and resources to keep the euro zone from breaking apart?
The question has grown more urgent since the release of data Friday showing a record-high rate of unemployment in the euro zone, poor job creation in the United States and a manufacturing slowdown in China. Combined, those signals have fueled fears of a second global recession.
On consecutive days last week, two of the most powerful figures in Europe — Mario Draghi, president of the European Central Bank, and Olli Rehn, the most senior economic official in Brussels — warned that the future of the euro zone was in doubt. In the words of Mr. Rehn, the union might well disintegrate unless policy makers took steps to bind the euro’s 17 nations closer together.
Coming as they did from two men at the very soul of the European project, the reprimands were a stark reminder of just how much the Spanish financial meltdown had shaken the confidence of the European brain trust, to say nothing of investors from New York to Beijing.
Over the weekend, leaders of two of the euro’s most vulnerable countries rallied to the cry of more unification. Mario Monti of Italy called for using euro bonds to create a quicker path to common debt for Europe. And Mariano Rajoy of Spain floated the idea of a common fiscal authority in Europe to synchronize budgets and manage debts.
But as global economic gloom deepens, there is a risk that such lofty talk could be too little, too late for investors, especially with Spain seeming on the brink of a banking collapse.
Sitting as Spain does on an estimated €220 billion, or about $273 billion, in failed real estate loans alone — a number that surpasses the entire output of the Greek economy — there is little doubt that Spain, with the fourth-largest euro zone economy — behind Germany, France and Italy — is too big to fail. Or, more precisely, to be allowed to fail.
