With Prospect of U.S. Slowdown, Europe Fears a Worsening Debt Crisis

European political leaders have garnered much of the blame for the continuing crisis of the euro, consistently failing to act with enough speed or severity to calm the markets. But the current panic has been partly produced by American politicians, whose noisy squabbling over the debt ceiling has combined with the prospect of another United States recession to undermine the potential for global growth.

It is that prospect — that Americans will again retrench and stop buying goods from China and Europe and everywhere else — that is putting new pressure on debt-ridden euro zone economies, most recently Italy and Spain.

Telephone lines were buzzing Sunday, with heads of government, economic ministers and central bankers from Asia to Europe to the United States discussing what might be usefully said before the markets’ opening on Monday. They all seem to agree about one thing, however: the need to defend the idea that the United States remains a reliable credit risk, despite a downgrade of a notch by Standard & Poor’s.

But the United States’ problems, including the probability of a double-dip recession, have depressed forecasts for growth.

“There is a real psychosis, but everything is mixed, and that creates the problem,” said Cédric Thellier, an economist at the French investment bank Natixis. “It’s the fear of the markets, so the rates climb and a negative spiral begins.”

It is less clear how Europe can stop the downward spiral. The European Central Bank can buy some Italian and Spanish bonds, but Italy and Spain together are too big to bail out. And Europe — dilatory and incremental, requiring unanimity — does not do shock therapy.

Europe already has historically lower growth than the United States, and the likelihood that it will continue to slow will make the debt crisis worse. For the best way to reduce sovereign debt, everyone agrees, is through economic growth. With growth, there are more jobs and more tax receipts, adding to government revenues, while the debt shrinks as a percentage of a rising gross domestic product.

But recession puts even more pressure on governments trying to contain deficits: tax receipts drop, spending on social benefits increases and the debt rises inexorably, unless governments slash spending further, which further undercuts growth.

That is the “debt trap” that is dragging down Greece, Portugal and other European countries, and it is the cycle that is pushing Spain and especially Italy to the edge of default. Markets now see growth sputtering further, making those large debts larger and harder to finance, and putting at risk a number of banks holding sovereign debt. Italy can manage its debt at a 4 percent interest rate, but it becomes unaffordable when the rate is 6.5 percent on a debt that is 120 percent of gross domestic product.

As much as the American drama and talk of a new recession added to Europe’s ills, Europeans themselves must accept most of the blame. The last in a series of emergency summit meetings, all intended to calm markets and end the crisis, was less than three weeks ago, on July 21. Steps taken then — including an effective though modest restructuring of Greek debt and new powers for the bailout fund, called the European Financial Stability Facility — seemed to calm the markets. But everyone knew that the problem was not really solved, and that the fund’s new powers had to be drafted and ratified by member parliaments, which would take until autumn, and that Spain and Italy remained vulnerable.

But then came the American debt-ceiling crisis and negative growth projections. Leaders are on vacation, trading is thin and speculators have a larger impact.

As stocks fell and the markets went after Italy and Spain, there were other mistakes. José Manuel Barroso, president of the European Commission, made ill-advised comments, as in a letter on Thursday, when he called for a “rapid reassessment of all elements” related to the stability fund, so that it was “equipped with the means for dealing with contagious risk.”

He even criticized European politicians for “undisciplined communication,” as if he were not doing the same. It was all food for the bear market, and it brought Mr. Barroso a rebuke from Berlin and even from his own commissioner for economics, Olli Rehn.

A spokesman for the German Finance Ministry said tartly, “It is not clear how reopening the debate only two weeks after the summit would contribute to the calming of markets.” At a news conference on Friday, Mr. Rehn said: “All of us who are in responsible positions in Europe will have to do much better in order to ensure verbal discipline and rigor.”

On Thursday, the European Central Bank reluctantly began to buy sovereign debt again, but not from Italy or Spain, and Jean-Claude Trichet, the president of the central bank, acknowledged that the board was split. Some on the board suggested that not buying Spanish and Italian debt was a way to force those countries to cut deficits and enact structural reform. But even when Italy said it would balance its budget in 2013 instead of 2014, it made little difference to the markets.

Late Sunday night, after a conference call lasting hours, the central bank’s governing board said it welcomed new financial stabilization efforts announced by Italy and Spain and urged their swift implementation, and it indicated that on Monday it would start buying their bonds.

As usual, the European Union is moving late, and by increments. Pressed by the markets and its own problems of aging populations, sovereign debt, inflexible labor markets, stagnant growth and especially the imbalance between north and south — competitive countries like Germany and uncompetitive ones like Greece and Portugal — the European Union must either move forward or backward.

Backward would mean a slow, complicated and expensive dismantling of the euro zone. Forward means “more Europe” — more solidarity, more coordination of fiscal policies, of retirement ages and taxes. In the end, to keep the euro zone whole, the richer, more competitive countries will have to put their credibility and some of their cash behind the poorer ones, not just to buy their bonds but to give them time to restructure.

At each point in the crisis, the German chancellor, Angela Merkel, has responded to calls for more European and German responsibility by saying no, and then, under market and peer pressure, saying yes. At the moment, she is saying no to “eurobonds,” too — bonds that would be issued with the collective responsibility of all euro zone members. There are good reasons for her to say no — domestic politics, the German Constitutional Court and the promise that Germans would not be asked to bail out another sovereign state.

But Germany is already doing that in a more hidden way, given the new shape and abilities of the stability fund, which the chancellor only reluctantly approved last month. Mr. Rehn, the European economics commissioner, said Friday he thought eurobonds were now a good idea. Eurobonds are likely to be the next incremental step, in which Germany is forced to say yes where it had said no, in order to put the collective economic strength of the euro zone, with its 330 million people, behind all of its members.

As Finance Minister Giulio Tremonti of Italy recently warned the Germans, “Just as on the Titanic, not even first-class passengers can save themselves.”