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Europe's Debt Crisis Moves Toward Bigger Economies

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With every day that passes, the troubles in Europe seem to grow bigger, and leaders are still at odds over how to contain the crisis. On Wednesday, just about every country in Europe saw borrowing costs rise.

For a long time the crisis was limited to small peripheral countries like Ireland and Greece, but no longer. Now, countries like Italy, Austria and the Netherlands have seen their borrowing costs rise as well.

"Even economies that do not have the fiscal problems of some of the other eurozone economies are considered a risk, [they] are being shunned," says Simon Tilford, chief economist of the Centre for European Reform in London.

Tilford says investors are beginning to lose confidence in the eurozone, and so interest rates are rising in every country but Germany. In one especially worrisome development, France — the eurozone's second-largest economy — has seen its borrowing costs creep higher this week.

Compared to a lot of countries, France's debt levels aren't especially bad. But Tilford says higher interest rates will make life a lot tougher for France, especially because the European economy is slowing.

"It's possible to foresee France being dragged into a kind of Spanish-Italian situation whereby their borrowing costs are prohibitively high, and they're being forced into cutting public spending dramatically into the face of a slump," Tilford says.

Leaders At Odds Over Fixes

At every step of the way, attempts to address the crisis have been too little, too late. This week, the European Central Bank bought Spanish and Italian bonds in an effort to drive borrowing costs down. The interest rates on Italian debt fell for a while, but soon enough they crept back over 7 percent.

Many European leaders are pressing Europe's central bank to be even more active, to flood the system with money or at least send a message that it's ready to do so.

In short, they want the central bank to take the kind of aggressive moves pursued by the Federal Reserve in the United States, but central bankers have refused to do so.

Eswar Prasad, professor of trade policy at Cornell University, says Germany prefers heavily indebted countries to cut their way to health. "At the core there are still very significant disagreements, especially between Germany and France, about how to resolve the crisis," he says.

Last month, European leaders unveiled a bailout package they hoped would appease the markets, but it's fallen well short of its goals.

Not even the recent changes of government in Greece and Italy seem to have done much to improve investor sentiment. Economists have generally hailed the arrival of Italy's new prime minister, Mario Monti, a former economics professor and European Union official. But by all accounts Monti faces a huge challenge trying to address Italy's fiscal problems.

Prasad says the troubles in Europe are so intractable that more and more people are talking about something that was once unthinkable. "The notion of the eurozone breaking up is no longer an abstract concept. It is beginning to sound more real," he says.

It's unclear how that would be done without sending shock waves through the financial system. But as the crisis drags on, European leaders seem unable or unwilling to contain it, and there's a growing sense that events may force their hand.

Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.

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