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Eurozone pulls back from the brink of catastrophe -- again

September 7, 2012 |  5:00 am

NYSE floor Thursday
Europe's economic roller-coaster slowed to a safe stop Thursday, after the latest white-knuckled plunge toward disaster, when European Central Bank President Mario Draghi vowed to control soaring interest rates that threaten to bankrupt heavily indebted Eurozone countries.

The promise of "unlimited" intervention by the central bank to buy up bonds at rates that countries like Spain and Italy can afford brought immediate relief in the form of a global market rally. And unlike previous moves to suppress interest rates that were cast as temporary measures, the long-term commitment made by Draghi is expected to keep Eurozone borrowing costs sustainable for the foreseeable future, or at least until the next crisis comes along.

GlobalFocusAnd potential crises lurk around every corner.

There's a breathlessly anticipated ruling expected next week by Germany's Constitutional Court on whether the Eurozone bailout fund is legal. German Finance Minister Wolfgang Schaeuble professed confidence Thursday that the court would find a way to see the European Stability Mechanism and its $630-billion rescue funds as permissible, despite constitutional restrictions on government-to-government investment.

On the same day the German court rules, Dutch voters go to the polls. The Netherlands' governing coalition collapsed in April, the latest to fall to disagreements over austerity measures and how to impose them. Deep public spending cuts demanded by the monetary club's strict debt ceilings have inflicted high unemployment -- more than 11% throughout the 17-nation Eurozone -- and gouging cuts in public services, pensions and welfare. Popular anger over austerity pain has thrown out leaders in Greece, Spain, Portugal, Italy, France and elsewhere during the three years of the euro crisis.

Revolving-door leadership can only contribute to the instability of a continent always on the edge of social explosion, warn those who have been following the economic dramas.

"Patience is going to be tested in the coming months. We'll see whether people go back out into the streets," said Keith Savard, senior managing economist at the Milken Institute in Santa Monica. "Personally, I'm surprised they're not there now in countries like Greece."

The shaky governing coalition in Greece, the Eurozone's most debt-laden economy and scene of protests over draconian budget cuts, announced last week that it had agreed on another $14.5 billion in spending reductions for the next two years. Unemployment is nearly 25% -- matching that of Spain -- and Germany, the debt-reduction taskmaster of the Eurozone, has made clear that Athens won't get another cent from its neighbors as it struggles to get its deficits below the 3% Eurozone target.

Mark Weisbrot, co-director the Center for Economic and Policy Research in Washington, welcomed Draghi's announcement as an overdue demonstration that the central bank will act to spare Eurozone lending from the ravages of speculation that one or more member states might exit the currency club, leaving investors holding billions in bad loans.

But he views the commitment to keeping bond yields under control as correcting only one of two misguided policies of the Eurozone. The other, an ideological mission of conservative-led countries to gut the social welfare systems of southern neighbors, continues to imperil jobs, growth and stability throughout the Eurozone, Weisbrot said.

Until Thursday, the central bank had intervened to shore up the euro with belated and inadequate measures, undermining confidence in the currency that allowed speculators to drive up borrowing costs to unsustainable levels.

"They've been playing a game of chicken for the past two years, and Draghi got tired of these near-death experiences," Weisbrot said of the relatively new central bank chief's departure from the half measures of his predecessor, Jean-Claude Trichet.

"But what is really going on is completely political," Weisbrot added. Germany, Austria, Finland and other Eurozone countries with more prosperous economies "really do want to dismantle the welfare state in these southern countries and they are using the financial crisis to do that."

He likens Europe's fiscal conservatives to the Republican majority in the U.S. House of Representatives who have been pushing for debt reduction through cuts in programs for the jobless and the needy.

"They're not as extreme as the House Republicans, but in Europe there is so much more to take away. Europe has all kinds of things we don't have -- national healthcare systems that were quite good, for instance. Spain just cut more than $7 billion from healthcare," Weisbrot noted.

While the central bank pledge to hold down borrowing costs buoyed markets worldwide Thursday, Draghi made clear that countries won't be eligible for bond rate intervention unless they first seek help from the bailout fund, where further paring of government spending is likely to be a condition.

International Monetary Fund chief Christine Lagarde confirmed that more affordable loans will come only with more belt-tightening. She hailed Draghi's bond-buying initiative and promised IMF help "to secure finance at a reasonable cost while they undertake sustained macroeconomic adjustment."

Translation: loans in exchange for government cutbacks.


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Photo: Traders on the floor of the New York Stock Exchange on Thursday after announcement of a European Central Bank bond-buying program and stronger-than-expected data on the U.S. job market. The Dow Jones industrial average rose 245 points to close at the highest level since December 2007. But analysts remain wary of the Eurozone's long-term stability. Credit: Spencer Platt/Getty Images