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Europe

Showdown in the euro crisis

As the summer break draws to a close, the apparent calm in the euro zone is over, too. No reason to panic, however: The European Central Bank is rumored to bring out the heavy artillery.

The government in Athens has miscalculated once again. It is lacking not just the originally estimated 11.5 billion euros ($14.1 billion) for the next two years, but 14 billion euros ($17.3 billion). That may not sound like much in view of the 240 billion euros ($296 billion) from two rescue packages and the serious cuts taken by creditors to the tune of 100 billion euros. But patience is wearing thin among lenders. It will be difficult to explain a third Greek bailout package to citizens in Germany, the Netherlands, Austria and Finland. Accordingly, lenders in the Greek crisis are debating a different route: lowering or even deferring interest for the loans.

Greece is not the only trouble spot: Spain looks to be on the brink of seeking a bailout. According to Madrid mayor Ana Botella, a new call for aid appears to be "inevitable."

Investors are turning their backs in droves on the euro zone's fourth-largest economy. During the second quarter of this year, more capital was drained than ever before in the past 20 years. Spain's high borrowing costs are another sign of the financial markets' mistrust: interest for ten-year bonds hovers at about seven percent. No country can carry such a burden in the long run, prompting Spain's Economics Minister Luis de Guindos to urge the European Central Bank (ECB) to buy sovereign debt to help Madrid cut its refinancing costs.

Euro-Logo (ddp images/AP Photo/Bernd Kammerer,fls)

All eyes are on the ECB, expecting concrete action

Last-resort lender

Just one month ago, experts would have shaken their heads and wondered, "has the man gone mad?" That would amount to open state financing on the part of the ECB - a barrier that must not be crossed.  But ever since ECB President Mario Draghi announced in July he would do whatever it takes to preserve the euro, the unthinkable has become an option. The fact that the Italian winked and said: "Believe me, it will be sufficient" is regarded as a sure sign the ECB is planning something big. Something that will by far surpass the relatively puny 210 billion euro bond purchase program and the two billion euros in cash injections.

That "something" is fleshing out. Germany's Spiegel newsmagazine reported the ECB plans to set a limit on the borrowing costs of individual countries and intervene on the markets to maintain this level. "Bazookas" or "Big Bertha" - the ECB is expected to mount deterrents to keep speculators at bay. It will win the fight for the common currency because the European Central Bank can print endless amounts of euro bills.

Shares on European stock markets rose at this speculation although most states are hit by recession and companies' profits are draining away - a breeding ground for the next bubble.

"Italian currency union"

The stock bubble and the ECB's apparent rescue plans have one thing in common - both are not lasting.

Jörg Krämer,

The ECB's apparent strategy would prevent a euro zone break-up, Krämer says

By making large-scale bond purchases, the ECB will not only alleviate the debt-ridden peripheral states' pressure versus borrowing costs but will also lighten the pressure on these nations to push through reforms. More rescue funds will become necessary, meaning the ECB's money presses will not stand still. The measures will prevent the euro zone from breaking apart, but higher inflation in the currency's core states will be unavoidable at some point, Commerzbank head economist Jörg Krämer said. In addition, Krämer said, "over the years, the euro would be clearly depreciated compared with other currencies by the ECB's focus on the peripheral states' problems and these states' weariness of reforms." High inflation and a weak currency are reminiscent of Italy in the 1970s and '80s - thus, Krämer predicted an "Italian currency union" for the euro zone.

Central Bank chief Draghi, nicknamed "Super Mario," will make financial markets, the southern European states and political leaders happy - for a short time.

In the long run, the countries on the euro zone's periphery will return to a pre-currency existence.  Ultimately, citizens in the core countries will pay the price for the preservation of the euro zone. It will take time for the consequences to be felt: politicians hope citizens will resign themselves to the stealthy process.

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