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Concern Spreads in Euro Zone as German Skepticism on Aid Grows

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Worries over the state of the euro zone and its debt load continued to affect markets on Wednesday. Even though 10-year bond spreads backed off Tuesday’s punishing record highs and the euro recovered from its Tuesday low, gold soared to more than $1,390 in Europe against the euro and sterling as investors sought safe havens.

Despite a bailout package for Ireland that was announced Sunday, many appear skeptical that the euro zone can control the spread of the crisis. Concerns that began with Greece and moved to Ireland are now focused farther downstream, on Portugal, Spain and Italy. According to Reuters, Willem Buiter, Citigroup chief economist, said in a research note this week that the situation in the euro zone could be the "opening act" of a global sovereign debt crisis that could spread to the United States and Japan.

Unrest is such that, according to a Reuters report, the U.S. Treasury announced late Tuesday that Lael Brainard, U.S. undersecretary for international affairs, will visit Europe this week, with stops in Madrid, Berlin and Paris. Brainard will discuss "economic developments in Europe" and the "shared agenda on strong and sustainable growth," according to Treasury’s short statement.

Deputy finance ministers from the G20 had taken part in a previously arranged Monday conference call to discuss the situation. The call was described as routine.

The European Central Bank (ECB) will meet Thursday, and it is thought that there may be an announcement of new actions to ward off the crisis, such as expanding government bond purchases to push yield down. Jean-Claude Trichet, ECB president, spoke out against the turmoil of the markets on Tuesday, warning investors not to underestimate policymakers’ determination to restore stability to the euro zone.

And Klaus Regling, the head of the EU's temporary rescue mechanism, said in a speech he gave in Singapore, “You may think and you sometimes read that Europe is in chaos, disintegrating, the euro about to disappear. This is wrong.”

Germany, however, is not so sanguine about the euro’s survival. It has resisted the notion of a “fiscal union” that subordinates individual nations’ sovereignty to economic policy for the good of the euro zone, and Chancellor Angela Merkel is reluctant to commit more of Germany’s money to rescue attempts. She fears that Berlin would become the de facto source of funding because of its strong economy.

Peter Bofinger, who is part of the German government’s "wisemen" panel of economic advisers, called the risks involved in preservation of the euro "enormously large.”

"For me,” he said on Germany’s NTV television late Tuesday, “it is decisive that we ask ourselves in Germany whether we want to continue to have the euro or not. We must have this discussion because we must ask ourselves whether we find it worth it to stand up for it."

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