PARIS — European leaders rushed Monday to stop a rampaging debt crisis that threatened to shatter their experiment in a common euro currency and devastate the world economy as a result.
In a measure of how rapidly the peril has grown, ideas unthinkable even three months ago were being seriously considered, including having sovereign nations cede control over their budgets to a central European authority.
World stock markets, hoping that Europe might finally be shocked into stronger action, had one of their best days in weeks Monday. The Dow Jones industrial average in New York rose 300 points. In France, stocks rose 5 per cent, a remarkable move.
More relevant to the crisis, borrowing costs for European nations stabilized after rising alarmingly in recent weeks — first in Greece, then in Italy and Spain, then in France and Germany, the two most stable economies in continental Europe.
The yields on benchmark bonds issued by Italy and Germany rose, but only by hundredths of a percentage point. The yield fell 0.1 percentage points on bonds of France, 0.14 points for those of Spain and 0.22 points for Belgium.
European finance ministers prepared for a summit beginning Tuesday in Brussels. Italy readied an auction of bonds designed to raise C8 billion, or about $10.6 billion — and steeled itself for the high interest rates it will have to pay.
In Washington, President Barack Obama huddled with European Union officials, and the White House insisted Europe alone was responsible for fixing its debt problems.
“This is something they need to solve and they have the capacity to solve, both financial capacity and political will,” presidential spokesman Jay Carney said.
As the crisis played out, a raft of ideas once considered taboo gained sudden prominence. Among them was a fiscal union of the 17 countries that share the euro currency, a proposal that some analysts say would be a great leap toward creating a United States of Europe.
Such a union could give a central European authority the power to enforce rules on the budgets of individual countries. That would pose a practical problem — how to make such a body democratically accountable.
More delicately, it would force Europeans to swallow their national pride, cede some sovereignty and agree to strengthen ties with their neighbours rather than fleeing the euro union.
“The common currency has the problem that the monetary policy is joint, but the fiscal policy is not,” Germany’s finance minister, Wolfgang Schaeuble, told reporters in Berlin. “Consequently, we are working now to expand the common currency through a common stability policy.”
With a fiscal union in place, the European Central Bank might also find it more palatable to stage a massive intervention in the European bond market to drive down borrowing costs and keep the debt crisis under control.
A fiscal union, and enforced budget discipline, might ease the ECB’s concerns about the concept known as moral hazard — essentially, that bailing out free-spending countries would only encourage them to do it again.
Another option is for the six nations in the 27-member European Union that have top-notch AAA credit ratings to sell bonds together, known as eurobonds, to help the countries in the deepest trouble because of debt.
The six countries are Germany, France, Finland, the Netherlands, Luxembourg and Austria. But Germany, which has the largest economy in Europe, has resisted this plan because German borrowing costs would rise.
While Europe buzzed over the possible solutions, the euro appeared to be in increasing danger. Experts said the currency could fall apart within days without drastic action, with consequences rivaling those of the 2008 financial crisis.
“Everyone knows that if the eurozone crashes the consequences would be very dramatic and in the race after that there would no winners, just losers,” said Finland’s finance minister, Jutta Urpilainen.
For countries that decided to leave the euro and return to their own sovereign currency, the conversion would be wrenching.
If Germany broke away, its national currency could rise in value quickly because the German economy is stronger on its own than the European economy as a whole. But a stronger German mark would damage Germany’s economy because Germany depends heavily on exports, and it would cost more for everyone else to buy German goods.
If weaker countries decided to leave, depositors would probably yank money out of their banks, fearing a plummeting currency.
If countries tried to repay their old euro debts with their own currencies, they’d be considered in default and would struggle for years to sell bonds in global financial markets. Corporations would face the same squeeze.
Economists at UBS have estimated that a weak country that left the eurozone would see its economy implode by 50 per cent.
The United States would suffer, too, if worldwide credit froze up and European economies tumbled into recession. The European Union buys almost 20 per cent of the goods the U.S. exports.
Wolfgang Munchau, a columnist for the influential Financial Times newspaper, wrote Monday that the common currency “has 10 days at most” to avoid collapse. He called for decisions on a fiscal union and the creation of a powerful common treasury.
Unlike the United States, which has centralized institutions in Washington for raising taxes and spending money, the euro nations have 17 independent treasuries with little oversight from Brussels, the headquarters of the EU.
While not explicitly backing a fiscal union, Germany and France have promised to propose measures that will make the 17 euro countries operate under strict and enforceable rules, so that no country, however small, can wreak such damage again.
Already, the Organization for Economic Cooperation and Development, an international group devoted to economic progress, was warning that the global economy was in for a rocky road. In its six-month report Monday, it said the continued failure by EU leaders to stem the debt crisis “could massively escalate economic disruption” and end in “highly devastating outcomes.”
The latest turmoil came last week, after Germany failed to attract enough investors for a bond auction, Italy’s borrowing rates rose alarmingly and ratings agencies downgraded the debt of Portugal, Hungary and Belgium.
Exactly how a fiscal union would take shape in Europe is an open question.
Schaeuble said the proposal would require passage only by the 17 countries that use the euro currency. The other 10 countries in the EU, such as Britain, Poland and Sweden, could adopt it if they wanted to.
But analysts said such a move would take a long time to come to fruition.
“We do seem to be moving slowly towards more of a fiscal union but at a pace that may result in all the components being put in place after a complete meltdown of the financial system,” said Gary Jenkins, an economist with Evolution Securities.
Many think the European Central Bank is the only institution capable of calming frayed market nerves. But Merkel, the German chancellor, has continually dismissed a bigger role for the ECB.
“The ECB has the means to provide a credible measure to avoid further contagion in the sovereign bond markets,” the OECD’s Chief Economist Carlo Padoan said. “And if you ask me if that is the lender of last resort function, I would say yes."