As voters across Europe call for fewer government cutbacks and more spending on public programs, investors are asking a simple question: How would it be paid for?
The option of raising money through bond sales appears to be shrinking as investors worry about the ability of eurozone nations to repay their loans. Attention has shifted to the European Central Bank, which could use its deep pockets to issue more inexpensive loans to commercial banks, but has shown no inclination to do so yet. And Germany remains unwilling to let the rest of the eurozone trade on its good name by issuing debt jointly.
“It’s very easy to abandon austerity measures because they are painful things to do,” said Otis Casey, the head of fixed-income research at Markit. “It is much tougher to figure out how to grow economies.”
Investors sent stocks tumbling around the world on Tuesday on fears that an austerity backlash in Greece could lead to its exit from the eurozone, but also on broader worries that other eurozone governments may not find a way to balance the conflicting demands of voters and investors.
While the Standard & Poor’s 500-stock index in the U.S. fell 0.4 percent, European indexes dropped more sharply, with the French CAC 40 index ending Tuesday down 2.8 percent. Spooked investors pushed up the borrowing costs for Italy, Spain and France, while the cost of insurance on the debt of those countries also climbed.
The situation in Europe represents a conundrum for investors who generally recognize that the cuts that have been made in recent months by countries like Italy, Spain and Greece have caused their economies to shrink.
More government spending could stimulate growth on a Continent that has been slipping further into recession. But Italy and Spain have already largely lost the confidence of bond investors around the world. Since yields on bonds issued by both countries spiked late last year, most new bonds have been purchased by domestic banks with funding from the European Central Bank’s two rounds of inexpensive, three-year loans to commercial banks, which significantly eased pressure in recent months.