Recent figures showing record-high rate of unemployment in the region add to worries
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 on Friday showing a record-high rate of unemployment in the euro zone, poor job creation in the United States and a slowdown in manufacturing in China. Combined, those signals have fuelled fears of a second worldwide 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 Rehn, the union might well disintegrate unless policy makers take steps to bind the 17 European Union nations that use the euro closer together.
Coming as they did from two men at the very soul of the European project, the cautions were a stark reminder of just how much the Spanish financial crisis 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 Europe?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.
German policy makers have said that kind of deeper budget integration and supervision is a prerequisite before any sort of euro bonds could be issued. Chancellor Angela Merkel of Germany called last week for a plan to give more power and competencies to the European Commission in Brussels, but through treaty changes as part of a five- or even 10-year process.
Merkel is trying to remake the continent?s economy after Germany?s own, with less-regulated labor markets and higher retirement ages at the top of the list. She would like to see strict deficit controls enforced across the euro zone by the European Court of Justice, as part of the broader ceding of national power at the heart of her vision for more centralisation.
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. Spain is sitting on an estimated 220 billion euros, or about $273 billion, in failed real estate loans alone ? a number that surpasses the entire output of the Greek economy. And with the fourth-largest euro zone economy ? behind Germany, France and Italy ? there is little doubt that Spain is too big to fail. Or, more precisely, to be allowed to fail.
Indeed, many investors and money managers now see Europe?s challenge as not how to bail out sickly Spanish banks, but how to keep Spain and even Italy afloat and in the euro zone as money keeps leaving these countries, forcing up interest rates and leaving sagging local banks as the only buyers of government debt.
?The euro zone is disintegrating and this has started to feed into institutional capital flight out of the euro zone,? said Jens Nordvig, a senior bond and currency specialist at Nomura in New York.