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Questions and answers about Europe’s debt crisis
Question of the Day
WASHINGTON (AP) — European finance officials who met Tuesday in Brussels were trying to save their common currency and prevent a meltdown that could tip the global economy into recession. The debt crisis that began in Greece is threatening to overwhelm much bigger economies in Spain, Italy and even France.
The finance ministers made little progress. Major disputes will now have to be addressed by European leaders, who will hold their own meeting in Brussels next week.
Markets had rallied this week on hopes that the 17 countries that use the euro would reach a deal and defuse the panic. But on Wednesday, world stocks fell after the finance officials’ meeting failed to stem fears that the eurozone might be nearing a breakup.
Here are some questions and answers about the crisis:
Q: Why the urgency now?
A: Earlier efforts, like bailouts of Greece, Portugal and Ireland, haven’t convinced investors that European policymakers can or will resolve the crisis. Jittery investors are demanding that European governments pay ever-higher interest rates on their bonds. Yields on Italian bonds, for instance, top 7 percent. That’s considered unsustainable. Even Germany, Europe’s economic powerhouse, struggled to sell bonds last week.
Q: Why are higher interest rates such a problem?
A: They make it harder for governments to pay debts. And they slow growth. Tax revenue then falls. The cost of unemployment benefits and other social programs rise. Some countries might abandon the euro, plunging the continent and perhaps the world’s economy into recession.
Q: Why would countries want to jettison the euro and go back to their own currencies?
A: To become more economically nimble. When they joined together 12 years ago, the 17 eurozone countries surrendered control of their interest-rate policies to a new European Central Bank. That meant they couldn’t cut rates to boost their economies. Nor could they reduce the value of their currencies, to give their exporters an edge. (A lower currency makes exports cheaper for foreigners to buy.) Abandoning the euro would let them escape an economic trap.
Q: How did Europe get into this mess?
A: The euro made it easier to do business across Europe and made the continent a potent economic bloc. Yet the experiment was flawed. Countries were harnessed to one another despite different economies and cultures but still managed their own finances. As long as prosperity reigned, banks were happy to lend at low rates even to weaker countries like Greece. The euro meant lenders didn’t have to worry about inflation in individual countries. Greece and others exploited the opening by borrowing heavily to finance their swelling budgets. But once the Great Recession hit hard, their debt proved crushing.
Q: Why is a solution so hard?
A: The ECB and Germany have resisted aggressive action. Many economists want the central bank to buy the debt of Italy and other struggling countries. That would push down interest rates and ease those countries’ borrowing costs. The ECB has bought Italian and Spanish bonds. But it’s loath to do so in a big way. The ECB says it must control inflation, not be a lender of last resort to governments. Germany opposes one idea — creating joint bonds backed by the whole eurozone — because it fears its own borrowing costs would surge if it had to borrow jointly with weaker countries.
Q: What options have European officials considered?
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