With Europe once again rattling global markets, many of the largest European countries are now rebelling against the German gospel of belt-tightening and demanding more radical steps to reverse their slumping fortunes.
One after another, European leaders arrived in Milan on Thursday for a summit meeting with their Asian counterparts, smiling for photographs despite gloomy financial news this week of stock markets tumbling and borrowing costs shooting up, especially in Greece, evoking memories of the euro crisis two years ago.
In past years, however, the eurozone nations buckled under to German demands to slash budget deficits and roll back public services, and then watched in dismay as unemployment rates shot into the double digits and growth collapsed. Now, France, Italy and the European Central Bank have coalesced into a bloc against Chancellor Angela Merkel of Germany, and they are insisting that Berlin change course.
“We need to show that Europe is capable of investing in growth, and not only in rigor and austerity,” said the Italian prime minister, Matteo Renzi, speaking to reporters outside the conference center after presiding over the opening of the meeting. He described the international financial situation as “very delicate” and said Europe had still not earned the confidence of international markets.
“As the I.M.F. has said, we need to focus on growth,” he said, referring to the International Monetary Fund.
The divisions between Europe’s leaders, at a moment when unity would seem critical, is one reason the markets are rattled — as well as the fact that policy makers still have not found a tool to revive growth in the face of staggering public debt.
The prospect of another European financial crisis can only bring an unwanted sense of discomfort for Washington and the rest of the world, given that China’s economy is slowing, the American recovery remains fragile and the Ukrainian crisis remains unresolved. Financial investors who had seemingly forgotten about the European crises in 2008 and 2010 now again seem worried about the Continent’s persistent lack of growth and the prospect of falling into a deflationary trap.
“It is the third phase of the crisis,” said François Godement, an analyst at the European Council on Foreign Relations, a research organization.
Politically and economically, Europe’s central country remains Germany and its central figure remains Ms. Merkel, backed by Jens Weidmann, the head of the German central bank and long an advocate of monetary and fiscal discipline. Germany is the eurozone’s biggest economic force, but it is now stumbling — even as its role as enforcer of austerity has made it a focus of fear, loathing and blame from some other European powers.
France, which has in modern times been Germany’s indispensable partner in European crisis management, is now in near revolt, and PresidentFrançois Hollande has joined forces with Mr. Renzi, who has presented an expansionary 2015 budget that will cut taxes despite pressure from Brussels to meet deficit targets.
Mario Draghi, the president of the European Central Bank, has pressed Germany to temper its insistence on budgetary discipline and to spend more on public works to stimulate the eurozone economy. The French have cheered him on. German leaders have resisted, while making clear their opposition to the more powerful stimulus measures that analysts expect the European Central Bank to deploy soon.
Mr. Weidmann has become increasingly alienated from other members of the European Central Bank’s governing council in his refusal to countenance large-scale purchases of government bonds, the kind of stimulus that the Federal Reserve used to help revive the United States economy. Mr. Weidmann speaks for a large swath of the German public and was once a close adviser to Ms. Merkel.
The political standoff has rattled international investors, who fear that European leaders are further apart than ever on how to pull the region’s economy out of its long slump — and that the European Central Bank will not have the freedom to take the extraordinary measures needed to stave off another crisis.
“German resistance against the E.C.B. pursuing more aggressive policy is one of the things spooking markets,” said Holger Schmieding, chief economist in London at Berenberg, a German bank.
Ms. Merkel, for the moment, is showing the same inflexibility with her European partners as she has in earlier confrontations over eurozone policies.
Before arriving in Milan, Ms. Merkel rejected any moves to loosen fiscal policy, including French requests for more flexibility on meeting deficit-reduction targets. Yet even in Germany, corporate leaders are growing frustrated that policy makers do not have answers amid persistent fears of deflation and concerns that the global economy is deteriorating.
“The private sector in Germany has the feeling the government is not doing the right things,” said Nicola Leibinger-Kammüller, chief executive of Trumpf, a German maker of machinery that uses lasers to cut metal.
The stock market rout that began Wednesday reflected a culmination of factors, including growing pessimism about Japanese and Chinese growth, the Ebola epidemic and conflict in the Middle East and Ukraine. But even after European and United States stock markets calmed on Thursday, investors registered their fear of a renewed crisis in the eurozone.
Greece’s long-term borrowing costs rose to nearly 9 percent, from 7 percent on Wednesday, to reach the highest level since January. In a pattern that raised uncomfortable memories of the dark days of 2010, the bond sell-off in Greece quickly spread to other nations with debt and growth problems, including Portugal, Spain, Italy and even Ireland.
Europe has already endured years of stagnation, high unemployment and a mounting public disillusionment that has fueled a political backlash, with right-wing, Euro-skeptic parties steadily gathering strength. In France, Mr. Hollande is suffering from rock-bottom poll numbers, while the right-wing National Front has gained ground. In Italy, Mr. Renzi remains popular, but anti-austerity sentiment is strong, especially resentment over budget cuts and a lack of growth.
One of the reasons Mr. Renzi stepped out of the meeting to speak on Thursday afternoon was to address complaints from regional governments in Italy that have seen their budgets cut. “If Italy wants to restart, and we will restart it, we need to reduce the waste,” he said. “Italian families have already done it. It’s now the turn of regional council members and representatives.”
Ms. Merkel faces opposite pressures in Germany, as the more the European Central Bank does to head off deflation and to stimulate the economy, the greater risk of a backlash among fiscal conservatives in Germany.
While Germans who want to scrap the euro currency union remain a minority, their numbers appear to be growing. Support for Alternative for Deutschland, an anti-euro party founded in Germany less than two years ago, rose sharply in recent state elections and represents 8 percent of the electorate nationwide, according to recent polls.
The party has drained votes from the Christian Democratic Union party of Ms. Merkel, a development that has probably encouraged her to take a hard line toward France after the French government said it would breach eurozone limits on national spending in an effort to stimulate the French economy.
Yet there are small signs that a European reconciliation could be possible. The finance ministers of France and Germany will meet in Berlin on Monday to try to reassure citizens that they can continue to work together. And even as Ms. Merkel said on Thursday that there could be no exceptions to European Union rules on national deficit targets, according to Reuters, she had previously hinted at some wiggle room.
During a recent speech to Parliament, she did not rule out measures to increase growth that would not conflict with her aim of achieving a balanced budget.
Source: The New York Times