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European Jitters Still Predominate

The stock market slumped slid sideways today, despite strong jobs numbers and a growing sense of US economic recovery (which I’m not totally buying, incidentally). The reason is simple – Europe is about to become a basket case, again. Weak bond sales and uncertainty in the banking sector, along with an almost certain recession among the Eurozone countries, will bring the global economy down a peg. Nicolas Sarkozy and Angela Merkel met today, but all they could do was press Greece and its bondholders for a debt solution. That’s a dicey game, for threatening Greece with holding back bailout funds would certainly risk a default. But there’s a sense that the entire thing is out of the hands of the leaders of the largest nations in the region:

Even as Mrs. Merkel and Mr. Sarkozy pledged quick action to stem the crisis, investors signaled the depth of their concern about the instability that has spread from Greece to the very heart of the euro zone by purchasing German debt at a negative interest rate for the first time ever.

Speaking at a news conference after the meeting at the chancellery building, Mr. Sarkozy acknowledged the uncertainty in the markets, saying, “The situation is very tense, very tense.”

There are increasing signs that Greece will not be able to make the structural changes to its economy that its leaders have promised. Prime Minister Lucas Papademos warned last week that without deeper spending cuts a default was a possibility.

A Greek default would cause greater turmoil, without a doubt.

Merkel and Sarkozy paid lip service to increasing economic growth, but the fiscal policy path doesn’t seem to account for that at all. Similarly, Italy’s technocratic leader, Mario Monti, highlighted growth today, but it’s unclear how that can occur in an age of austerity.

In an interview on national television on Sunday, Mr. Monti said he would unveil a package of growth-enhancing measures — in particular, loosening professional guilds and changing labor laws to encourage hiring and firing — at a meeting of European Union finance ministers on Jan. 23.

“We want to create more space for competition and merit in varying sectors,” he said in an interview on the state-owned Rai national broadcaster. “That involves reducing protection and the different ways that industry sectors, in Italy more than in other countries, try to create advantages for those who are inside the fortress to the detriment of those who are outside.”

Somehow, Europe has deluded itself into thinking that labor market reforms equal job creation measures. Maybe over a 50-year time horizon that’s true, if the economy gets more efficient as a result. In the near term, you’re just making it easier to fire people. And that will probably lead to a lot of people getting fired.

Investors are clearly spooked, seeing Europe sinking and no prospects for growth likely. The emergence of German debt as a haven for investors shows these jitters very well. If people would rather park their money at a loss than risk the market, we have an economic problem.

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David Dayen

David Dayen