March 18, 2011
Policy makers at Europe's center are at risk of losing hold of their monetary and fiscal levers.
This ought to make investors uncomfortable, not least because it threatens an aggressive rate response by the European Central Bank.
The fiscal problems are most immediately obvious. The Irish and Greek bailouts pushed through last year are only a temporary solution—they saddle countries already struggling to cover their obligations with even more unaffordable debt.
Ireland wants to renegotiate the terms of its rescue to a lower interest rate paid back over a longer period. In exchange, the Germans and French want an increase in Ireland's 12.5% corporate tax rate, which is about half the euro zone's average.
Greece, which agreed to sell and let public land and to continue its austerity program, was granted better terms on the €80 billion ($112 billion) of EU bail-out funds it was given last year. The interest rate was cut by a percentage point to 4.8% while the repayment period was extended to 7.5 years from three years.
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