German Economy At Risk For Rescuing Neighbors

The financial situation in Europe quickly deteriorated on several fronts this week. Spain's borrowing costs are soaring and several regions of the country are on the verge of asking the central government for a bailout. Spain is also trying to prevent a collapse in its stock market by banning short selling. At the same time, the continent's strongest economy, Germany, was put on a negative outlook by Moody's because of the huge costs it would absorb rescuing its weaker European neighbors.

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Once again, Europe's debt troubles are taking a toll on this side of the Atlantic. The Dow has fallen three sessions in a row, the largest percentage decline since early June. Today, Moody's ratings agency cut its outlook for Germany and the Netherlands. And those two countries are among the healthiest economies in Europe.

Meantime, in Spain, financial turmoil is raising new fears for the entire eurozone, as NPR's Jim Zarroli reports.

JIM ZARROLI, BYLINE: Every few weeks, a fresh wave of anxiety seems to wash up on Europe's shores. In recent days, the markets have been focusing once again on Spain. Last week, the province of Valencia said it might ask for aid from the Madrid government to pay its debts.

Gayle Allard is a professor of economics at Madrid's IE Business School.

GAYLE ALLARD: The fear I think that this set off in markets is that maybe all the other regions were lining up behind it. And so, you know, this would have a huge impact on Spain's deficit.

ZARROLI: Spain is already struggling through a banking crisis. And there are big questions about whether the government can pay back the money it's borrowed in the financial markets. It's the same problem that Greece faces but Spain is much bigger, so the risks are a lot greater.

ALLARD: Anything with Spain's name on it now is received in kind of very extreme, exaggerated way by markets. And not a whole lot Spain can do about it, actually.

ZARROLI: Allard says Spain has done much of what Europe asked for and that includes cutting government spending. But the markets are unimpressed. As investors have grown more worried, interest rates on Spanish debt have climbed. And Nariman Behravesh, chief economist at IHS Global Insight, says there's growing speculation that Europe will have to help out.

NARIMAN BEHRAVESH: Probably Spain will need a bailout and there's probably not enough money there in terms of the existing committed funds. So they're going to have to go back to the well, which politically is going to be very problematic, but they're going to have to do it.

ZARROLI: Going back to the well means persuading the richer countries, especially Germany, to come to the rescue. Germany has balked at helping the other countries unless they first cut spending. But Behravesh says this approach doesn't seem to be working.

BEHRAVESH: For while it looked like Germany might be able to sort of stay above the fray, as it were, and not be that badly hurt. But recent data suggests, in fact, that Germany is getting dragged down.

ZARROLI: Lately there's been a stream of reports suggesting that Europe is in a recession or approaching one. Today came word that a survey of purchasing managers in Germany fell for the third straight month. Now Moody's is warning it might downgrade Germany's debt, which has long been seen as an uber safe investment.

Gayle Allard, of IE Business School, says the Moody's warning should send a message to the richer European countries that they can't sit back and watch problems fester in the south.

ALLARD: Maybe Spain becomes a test case. Are you really going to force this country to the wall or watch it be forced to the wall? And if you do, you may lose your currency and that's the crowning achievement of the eurozone.

ZARROLI: Meanwhile, the troubles in Europe continue to be felt in the United States. Europe isn't a huge export market for American products, but some companies with major operations on the continent are starting to feel the impact. That's one reason U.S. stock prices were down today and interest rates on U.S. government debt fell to new lows.

Jim Zarroli, NPR News, New York.

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