A Trillion for Europe, With Doubts Attached

Like the giant financial bailout announced by the United States in 2008, the sweeping rescue package announced by Europe eased fears of a market collapse but left a big question: will it work long term?

Stung by criticism that it was slow and weak, the European Union surpassed expectations in arranging a nearly $1 trillion financial commitment for its ailing members over the weekend and paved the way for the European Central Bank to begin purchases of European debt on Monday.

Markets rallied around the world in response to the concerted defense of the euro, a package that exceeded in size the United States bank bailout two years ago.

Major stock indexes in the United States rose about 4 percent on Monday, while a leading index of blue-chip stocks in the euro zone rose more than 10 percent. The premium that investors had been demanding to buy Greek bonds plunged. But by Tuesday, that rally appeared to have sputtered out, with many Asian markets down slightly.

And as details crystallized of the package’s main component — a promise by the European Union’s member states to back 440 billion euros, or $560 billion, in new loans to bail out European economies — the wisdom of solving a debt crisis by taking on more debt was challenged by some analysts.

“Lending more money to already overborrowed governments does not solve their problems,” Carl Weinberg, chief economist of High Frequency Economics in Valhalla, N.Y., said in a note. “Had we any Greek bonds in our portfolio, we would not feel rescued this morning.”

Such concerns may be part of the reason the euro fell back when American markets opened, after surging in Asian and European trading, to end the day at about $1.28.

Another big issue is whether bailing out economies creates moral hazard. Other countries may continue to skirt the kinds of actions that would lower their budget deficits and debt loads — steps painful to the public and dangerous to politicians — because they too can expect to be rescued.

It is clear that Europe’s fund will require the sustained support of the 27 nations that form the European Union — not to mention its richest member, Germany, which has until now deeply opposed a bailout.

Indeed, for all the excitement about the scale of the effort, it is important to remember that the core fund does not now exist. The fund, known as a special purpose vehicle, would raise money by issuing debt and making loans to support ailing economies. The European countries would guarantee that fund.

So the package is merely a commitment for the vehicle to borrow money if a large economy like Spain, which represents 12 percent of the output in the euro zone, asks for assistance. The International Monetary Fund is pledging 250 billion euros to support the effort. Sixty billion euros under an existing lending program pushes the total to near $1 trillion.

The fund is therefore more a theoretical construct than the Troubled Asset Relief Program that was created in the United States, and that is where things get tricky.

By definition, if Spain came to a point where it could no longer finance itself, interest rates would be on the rise. The several hundred billion euros for the fund would not only come at a high cost, but would bring additional pain to already indebted countries like Portugal, France, Italy and the United Kingdom, which back the special purpose entity, thus compounding the region’s debt woes.

For Dominique Strauss Kahn, the I.M.F.’s ambitious managing director, the program is a hard-earned victory that allows the fund to assume a central role in pushing for economic reform in Europe.

Greece’s cabinet on Monday approved major changes in its pension system, including an increase in the early retirement age to 60 and the broader retirement age to 65, as part of a three-year package of reforms imposed by the fund and the European Union.

Yet some fund staff members have pointed out that, if anything, the rescue package and the I.M.F. commitment to support it might give countries like Spain an excuse to retreat a bit from the tough measures that have distinguished Ireland’s and Greece’s austerity efforts.

“It shows that Europe can come together,” said a banker with close ties to the fund who was not authorized to speak on the record. Though it takes the pressure off Spain, “it does not address structural pressure in Europe.”

In effect, Germany and other wealthier European countries are assuming responsibility for the creditworthiness of Greece, Portugal and the other debt delinquents.

But the European central government is weak and must invent new structures to administer the promised aid.

“The debt crisis will change the nature of European monetary union,” Jörg Krämer, chief economist at Commerzbank, wrote in a note on Monday. “The euro zone has moved away from a monetary union and towards a transfer union.”

Mr. Krämer warned that the shift could “undermine political support for the euro zone in the long run. After all, it is unlikely that the countries receiving support will let others permanently dictate their economic policies. Moreover, voters in the countries giving support will not be willing to permanently give financial support to other countries.”

On Monday, Jean-Claude Trichet, president of the European Central Bank, warned European governments, all of which will probably miss the budget deficit goals they agreed to when they created the euro, that they must continue to cut government spending.

At a time when economies, from Romania and Hungary to Britain and Spain, are struggling to meet their deficit goals, Mr. Trichet’s warning took on extra resonance.

Romania and Hungary are operating under I.M.F. programs, while Britain and Spain are trying desperately to persuade markets that they will not experience the financing problems that have forced so many countries in Europe to seek assistance.

“For us, what is absolutely decisive is the commitment of governments of the euro area to take all measures needed to meet their fiscal targets this year and in the years ahead,” Mr. Trichet told reporters at a press conference in Basel, Switzerland.

But after 10 years of mostly missing fiscal guidelines during a worldwide economic boom, it remains uncertain if more finger-wagging by Mr. Trichet and a new fund backed by the I.M.F. will be enough to return European nations to fiscal health as their economies stagnate and social pressures build.