Greater Cleveland's recovery ranks in top of U.S. metro areas, study says

Greater Cleveland is experiencing one of the nation’s strongest economic recoveries, according to a report released Tuesday by the Brookings Institution and the London School of Economics.

Ranked 10th among 50 US metro areas and 49th among 150 cities worldwide, Cleveland’s recovery may get worldwide attention.

The report ranked the metro areas based on “annual growth in employment and per capita income across three time periods: pre-recession (1993-2007), recession (2007-2009) and recovery (2009-2010).”

According to the findings, “Greater Cleveland's turnaround is especially impressive considering that the area ranked 135th of 150 cities before the recession and 131st during the downturn.”

Cleveland’s climb from the bottom 20 to the top 50 is most likely due to rising incomes and productivity. It is thought that one of Cleveland’s best opportunities is to link segments of its economy, notably manufacturing, to the Asian and Latin American markets.

Fed survey: Economic growth picks up in most of US

A new survey by the Federal Reserve states that 10 of the Fed’s 12 regions reported economic growth picking up this fall.

According to the survey, “Stronger production at factories helped propel growth in most parts of the country. Makers of fabricated metals and autos and related goods saw the biggest gains.”

Other industries showing marked improvement included tourism and the sales of new cars and light trucks. All of these factors contributed to a modest job growth.

While the country saw a burst of hiring in October, it is clear that employer confidence is still shaky. For instance, the survey showed that the Atlanta and Chicago regions prefer part time and temporary workers. As we learned in class, this is a sign that increased full time employment may also be around the corner.

The Fed will meet again on Dec. 14 to assess the success of the Q2E program in November.

Congress Passes 15 Day Funding Bill

The temporary federal budget was set to expire Friday. The senate passed another measure on Thursday in order to fund federal operations for 15 more days. There has not been a formal budget as Congress failed to pass a new budget at the start of the fiscal year. Therfore, a series of resolutions similar to this additional 15 day funding have been passed. If this funding was not passed then greater unemployment would most likely be experienced among federal employees and government activities would decrease. These two scenarios would have a tremendous impact on the economy.

Jobs Setback Clouds Recovery

The job report from the Labor Department shadowed new doubts about the growth of the economy. Employers added just 39,000 jobs in November a substantial decline from the last month. The unemployment rate increased to 9.8% from 9.6% due to more people joining the labor force. The private sector added only 50,000 jobs offsetting the 11,000 jobs lost due to local government budget cuts. The future does not seem that good for the unemployed, according to Goldman Sachs economists the unemployment rate will continue to remain at a high 8.5% until the end of 2012.

Colbert Report Video: David Stockman

David Stockman, President Reagan's budget director, oversaw the tax cuts that led to the Reagan deficits. Now he wants America to get out of debt by letting the Bush tax cuts expire and cutting the defense budget. Colbert asks what happened to the "trickle down" theory, to which Stockman replies: "I'm trying to sober up."

Scolding China Won’t Help

This article basically sums up my entire argument about how pressuring or trying to intimidate/force China will backfire. Jim Zimmerman was the head of the U.S. Chamber of Commerce - the biggest player in American business in China and is actually my dad's best friend. Their family has lived in Beijing for over ten years now so overall he is a very credible source.
He recommends giving Beijing credit for what it has accomplished even if it is not up to American standards. He stresses that China has and will only respond to conversations not lectures. Jim also reminds outsiders that they need to keep in mind that China has been historically very traditional and conservative - liberal ideas cant be forced on Beijing, they need to work slowly.

Unemployed, and Likely to Stay That Way

This article discusses the impact the long-term unemployment spell is having (and will have) on workers in the US. It also focuses on various reasons the currently unemployed are unable to find jobs. The reasons include the possibility that these workers were not doing well in their work before they became unemployed, workers being laid off as industries moved into a permanent decline and workers previously involved in dynamic industries, like software engineering, may have missed out on opportunities of new development of skills during the period of their unemployment.
I feel after the market picks up, it will become even more competitive as many employers who were laid off have gone back to school and will return with a stronger qualification than others re-entering the market who did not have that same opportunity after becoming unemployed. Unfortunately, this could push back a large population even further from finding a job.

Banks in Talks to End Bond Probe

U.S. securities regulators are in preliminary discussions with several major Wall Street banks aimed at reaching settlements to resolve a broad investigation of their sales of mortgage-bond deals that helped unleash the financial crisis, according to people familiar with the matter.

The probe involves complex pools of mortgages and other loans called collateralized debt obligations, or CDOs, slices of which were sold to different investors.

Wall Street has come under intense fire from critics for its sale of the securities, seen as a central factor in the crisis. Settling the allegations would resolve one of the biggest law-enforcement threats hanging over leading banks.

Fed made $9 trillion in emergency overnight loans

The loans were made through a special loan program set up by the Fed in the wake of the Bear Stearns collapse in March 2008 to keep the nation's bond markets trading normally

House Sets Vote Tomorrow on Tax Cuts as Talks Begin

Dec. 1 (Bloomberg) -- House Democrats scheduled a vote tomorrow on their plan to extend middle-class tax cuts and let them expire for higher-income Americans as lawmakers and the Obama administration sought a bipartisan compromise.
Democrats announced their plan for a House vote tomorrow which would force Republicans to choose whether to support extending tax cuts just for the middle class. Senate Republicans, meanwhile ratcheted up pressure for extending the cuts for all taxpayers. Republicans told Majority Leader Harry Reid they will refuse to move forward with any legislation until the Senate votes to extend the tax cuts and fund the government’s continued operation. President Barack Obama and many Democrats want to retain the lower rates for individual annual income of up to $200,000 and married couples earning as much as $250,000 a year. Under the president’s proposal, the lower rates would expire for income above those figures. Republicans support extending the tax cuts permanently for all income levels.

Obama said he’s “confident” that lawmakers will be able to reach agreement on extending the tax cuts.

The talks “got off to a good start” even if “there’s going to be some lingering politics that have to work themselves out,” he told reporters at the White House.

During the meetings, Democrats insisted on extending the tax cuts only for the middle class, and the administration pressed for resolution by the end of the year, according to a person with knowledge of the discussions who spoke on condition of anonymity.

Wall Street Comes Back With a Rush

Stocks on Wall Street rallied Wednesday as investors showed renewed confidence after developments in Europe and encouraging economic reports in the United States and Asia.

Indexes were up more than 2 percent at the close, following European and Asian markets that appeared to put aside weeks of concern over the financial troubles in Europe, most recently in Ireland.

Jeffrey Kleintop, chief market strategist for LPL Financial, said the latest manufacturing report out of China was a catalyst after apparently calming market fears that the economy of the country, a major importer of commodities, could be slowing as it wrestles with inflation and tries to slow the pace of the housing bubble.

California Budget Crisis

Since the onset of the recession that began in 2007, California's financial problems have grown as outsized as the state itself.

In October 2010, a record 100 days late, the Legislature passed a $126 billion budget that promised to close a $19 billion deficit. But by the next month, the departing governor, Arnold Schwarzenegger, had called a special session of the Legislature for Dec. 6 to begin dealing with a projected $6 billion shortfall in the just-passed budget.

And state officials have predicted yet another shortfall, of $19 billion, in the budget for the next fiscal year. The incoming governor, Jerry Brown, must propose a new budget in January 2011.

What Chinese Consumers can Teach Us?

In this article, Rick Newman is interested in how quick and efficiently China recovered from the global recession. He uses McKinsey and Co's recent survey of 15,000 Chinese consumers to analyze the buying behavior of a typical consumer in China. This piece is interesting because it compares the current Chinese consumers to the American consumers in 1950's/60's; both somewhat naive and fueled by optimism. One of the reasons to the quick recovery is that Chinese consumers, no matter the income, are not interested in credit. Because the success of the economy is somewhat a new thing, the consumers could change as they begin to trust in the government more while the economy continues to grow. Another behavior that US could learn from is how carefully they budget their disposable income in China. They are careful to spend only within their means. The elaborate research Chinese consumers perform before making the final decision on a product is an interesting variable in their economy. If US acted this way I imagine the way our price system works would have to change.

It will be interesting to see if the buying behavior of the Chinese changes as the country becomes wealthier. For now the major difference I see between our two economies is that the Chinese consumers both value and manage their money more than we do in the USA.

Shame on EU?

Well, the US is thinking about stepping in to shore up confidence in the EU and the Euro.

"The United States would be ready to support the extension of the European Financial Stability Facility via an extra commitment of money from the International Monetary Fund, a U.S. official told Reuters on Wednesday.

"There are a lot of people talking about that. I think the European Commission has talked about that," said the U.S. official, commenting on enlarging the 750 billion euro ($980 billion) EU/IMF European stability fund. "It is up to the Europeans. We will certainly support using the IMF in these circumstances.""

This should be interesting.

Fed Papers Show Breadth of Emergency Measures

New data shows that the Fed's support during the economic crisis went much further than many of us believed.
Even corporations like McDonald's, Caterpillar, Toyota, Verizon, and others had to rely on the Fed for short term I.O.U.'s to pay their suppliers and make payroll - day to day operation loans called commercial papers.
The cause for this was that during the highest points of economic trouble, even these very credit worthy corporations found that they could not find a bank to make loans so they had to turn to the Fed.
The Fed had to continue to support the market for commercial paper well into the summer of 2009, when many believed the economic crisis to be over.

Before Business Leaders, Bernanke Discusses Unemployment’s Toll on Americans

The Federal Reserve Chairman, Ben Bernanke, focused at a 75-minute discussion at Ohio State University on the importance of growth in the current economy to reduce the high levels of unemployment. He specifies how the slow growth is "not a credit issue. It’s not the financial system or a banking issue. I think at the end of the day it’s clarity.” However, the business owners on the panel complained about tight financial conditions, difficulty in obtaining credit, trade policies and currency manipulation.
The comment made by one of the students in the audience “If you inflate the economy without doing anything about growth, you’re just printing money,” sums up why just increasing the supply of money is not good enough. Consumers must express demand in the form of consumption for the economy to grow. When there is higher consumption, prices will increase (as demand increases), this will lower unemployment and the fear to spend will begin to evaporate and the velocity of money will increase, as opposed to the current hoarding of cash.
The article does, however, conclude that Ben Bernanke understood the need for clarity regulatory, trade and fiscal matters. This is a good sign that the focus will shift from increasing money supply to encouraging consumption.

Developers Compromising, but Carrying On

This article is about two residential developers investing in luxury projects in the current market conditions. Mr. Frank Boccunfuso is investing in two luxury projects near the Byram River and in Yonkers, Fleet Mill Street (an offshoot of SFC) will rehabilitate a vacant building in the densely populated Getty Square area near the Hudson River.
Both instances share the basic compromise of using either their own capital or grants from the government. Another compromise is giving up on the idea of selling units in favor of rentals.
The focus of this article is that mortgages are much harder to obtain now and so is financing. Thus, there has been a shift in housing culture from owning a home to renting one instead. However, although developers have had to change their plans, their continued investment shows there is a sign of improvement in the housing market. It is important to understand that the increase in housing prices was not created by higher incomes or increase in population but rather by lower borrowing standards and thus easier financing. This lead to fewer defaults on mortgages, which thus reduced perceived risk of lending, thus more people were willing to lend and therefore this further lowered standards of credit. This vicious cycle lead to the housing market crash. It is reasonable to suggest that with the current market being extremely cautious, consumers will go back to renting housing instead of purchasing (because of increased difficulty in borrowing) because they will not be able to afford the large down payment required.

Bernanke warns on long-term joblessness

In this article, Ben Bernanke defends the Fed's easy money policy saying that high levels of unemployment for long periods could cause serious social issues. The Fed said that its quantitative easing policy is necessary since inflation rates are still averaging below the target of 2% and the jobless rates remain high too.

The Fed maintains this position even though many people at home and abroad say that they are doing this deliberately to push down the dollar or that it will cause runaway inflation.

Bernanke said it is more important to find the unemployed jobs because the longer they are out of jobs, the lower is their potential to reenter the labor force because they might lose their skills and employers question their capability. "Bernanke also said the elevated jobless rate makes businesses and households reluctant to spend because they are uncertain of future income."

Slump in Housing Prices Deepens

The U.S. housing market is showing signs of falling deeper into a slump that could weigh on the nation's economic recovery.

Home prices nationwide were down 1.5% in the third quarter, compared with a year ago, according to the S&P/Case-Shiller home-price index released Tuesday. The drop reflects the sharp fall in home sales after government home-buying tax credits expired earlier this year. Prices fell even more, by 2%, in the third quarter, compared with the second quarter.

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Case-Shiller's composite index for 20 major U.S. cities fell 0.7% in September, compared with August, not adjusted for seasonal variations. The biggest decline was in Cleveland, where prices fell 3% in September, compared with August. Minneapolis, Portland, Ore., and Phoenix were also big losers, with monthly price declines between 2.1% and 1.5%.

The best showing was in Washington, D.C., where prices increased 0.3% in September from August.

Despite an improving job market and growth in consumer spending, home prices and sales have stayed consistently depressed through the economy's year-old recovery. The expiration of federal tax credits for home buyers, problems in foreclosure processing and an unemployment rate still at 9.6% have kept buyers at bay and prompted sellers to cut prices.

Those drawbacks, combined with a large stock of unsold homes and distressed sales that hold down prices, have left new-home sales and construction near historic lows.

Consumer Confidence Grows

"The housing market is stuck at the bottom, and we've been stuck there for months," said Patrick Newport, an economist at IHS Global Insight.

A separate report Tuesday showed that consumers are feeling a bit better about the economy in spite of the woeful housing market. The Conference Board, a private research group, said its index of consumer confidence increased to 54.1 in November from 49.9 in October. While confidence remains low by historical standards, the November reading was the highest since June.

Consumers were more optimistic about the business conditions in the near future. Those anticipating improving conditions in the next six months rose to 16.7% from 15.8%, while those expecting worsening conditions declined to 12.1% from 14.4%.

Views on the labor market also improved slightly. The percentage of consumers who expected more jobs in the months ahead rose to 15.5% from 14.5%. The proportion expecting fewer jobs fell to 18.8% from 22.3%.

Japan Industrial Output Falls 1.8%

TOKYO—Japanese industrial output dropped at the fastest pace in 20 months in October, a further sign of fragility in the nation's economic recovery, as the expiration of government purchasing subsidies for new cars led to shrinking auto production.

Output fell 1.8% in October compared with the previous month, data from the Ministry of Economy, Trade and Industry showed Tuesday, deeper than the 1.6% decline in the previous month and marking the fifth-straight monthly fall.

The result, however, was much better than the 3.3% fall economists expected. Analysts said the higher figure was mainly due to a boost in production of flat-screen TVs as companies anticipate a surge in demand before subsidies for energy-efficient home appliances are sharply reduced in December.

Even so, the data will do little to soothe investor concerns over the state of the Japanese economy, which some expect to further stagnate as exports, the nation's key engine of growth, begin to lose steam.

Production is likely to remain sluggish as smaller government-subsidy programs offer less support to domestic demand and slowing global growth means fewer orders from overseas, analysts said. That would likely drag on Japan's already stagnant labor market, which in turn could further depress sentiment and bite into domestic consumption.

Separate data released Tuesday showed Japan's jobless rate rose to 5.1% in October, while household spending slipped 0.4% during the month. Daiwa Institute of Research economist Hiroshi Watanabe said the unemployment rate may rise toward 5.5%, just 0.1 of a percentage point behind the worst level on record.

Other data released Tuesday added to the grim view. Japan's housing starts rose 6.4% on year in October, weaker than the 10% gain economists expected. Construction orders slipped 5.6%, the government said.

Analysts also saw cause for concern in the inventory-shipments ratio for October, which rose 7.6% in the month after climbing 1.3% in September. Companies raising inventories at a faster pace means further declines in output are likely, analysts said.

"This is certainly a bad sign," said Daiwa's Mr. Watanabe.

Analysts added that a cautious approach also must be taken toward firms' relatively bullish output forecasts for the next couple of months. The data showed manufacturers, on average, think production will increase 1.4% in November and 1.5% in December.

Firms may be factoring in an anticipated surge in demand for flat-screen televisions until the end of November, analysts said. The government is providing purchasing subsidies for new TVs ahead of the switch to digital broadcasting next year, but those subsidies will be halved from December due to a lack of funds.

"You must not be so optimistic on this, and we should remain cautious about production going forward," said Hirokata Kusaba, a senior economist at Mizuho Research Institute.

During October, production of automobiles fell 10% from a month earlier, while general machinery—which includes flat-screen TV panels—rose 3.8%, the METI data showed.

The data also showed shipments fell 2.7% while inventories slipped 1.5%.

Debt Infection Continues to Spread

The European debt crisis intensified on Tuesday with borrowing costs surging for Italy and Spain and signs of stress emerging in the key market for lending between banks.

The spreading contagion, which also saw the euro fall below $1.30 for the first time in two months and stock markets edge lower, highlighted the degree to which last weekend's $90 billion bailout of Ireland not only didn't soothe investors' concerns about the ability of the European Union to manage its fiscal and economic strains, but instead served to inflame them.

Reflecting the pressures on Europe's weaker economies, Standard & Poor's said it was reviewing its credit ratings for Portugal, citing a rethink of the country's ability to shore up its fiscal position, as well as the prospect that bondholders might be forced to take losses on future sovereign bailouts. S&P said it would weigh whether to downgrade five Portuguese banks.

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European Pressphoto Agency

Students in Rome protested an Italian education-reform bill on Tuesday.

European leaders at the weekend meeting attempted to clarify the terms in which bondholders would take losses after mid-2013, but that talk further unsettled investors and sparked questions from credit-ratings providers.

"That's a different set of facts that needs to be analyzed," said John Chambers, chairman of S&P's sovereign-ratings committee. Fitch Ratings' head of sovereign ratings, David Riley, described the talk of so-called haircuts as "a source of uncertainty," while Moody's Investors Service singled out the haircut issue as a concern in a note on Ireland's rating.

Much of the attention Tuesday was on the Italian bond market. Investors have long been skeptical of the outlook for countries such as Ireland, Portugal and Spain. Italy, despite a big debt burden, was seen as less vulnerable to the crisis because it doesn't rely heavily on foreign investors to buy its debt.

But on Tuesday, Italy's cost of borrowing for 10 years jumped to 4.73%, a gap of 2.05 percentage points over the rate paid by Germany, the euro zone's strongest economy. That's up from 1.50 percentage points a week ago.

"The markets have moved quickly from Spain to Italy and that's a real eye-opener," said Gregory Peters, global director of fixed income research at Morgan Stanley. "What Italy represents is a real risk that the crisis moves to the core" of the European Union, he said.

Meanwhile, companies in Europe have seen their own borrowing costs rise substantially. Only about $25 billion worth of new bonds have been sold by European banks in November, compared with the $67 billion sold in November of 2009, according to data provider Dealogic.

The key market for lending between banks also showed evidence of growing strains.

The cost of borrowing U.S. dollars for three months in London rose for the fifth consecutive day to hit 0.3%, its highest level since August. While still below the 0.53% peak hit during Greece's crisis in the spring, and nowhere near 2008's peak, the move was enough to worry investors.

Reflecting the circular nature of the debt crisis, one reason it is costing banks more money to borrow is concern about the value of the European government bonds typically used as collateral for loans and held on the books as capital reserves, said John Brady, senior vice president of global interest rate products at MF Global.

"The credit spiral is getting worse," Mr. Brady said.

In another reflection of the expanding concern, the cost of insuring government bonds of Portugal, Belgium, France, Spain and Italy, hit record highs on Tuesday, according to data provider Markit. It now costs $271,000 a year to insure $10 million of Italian government bonds for five years, a jump of $26,000 from a day earlier.

While Italy's annual budget deficit is much smaller than some of its euro peers, its overall debt burden is the biggest in the euro zone after Greece as a proportion of its economic output, according to the International Monetary Fund. Like Portugal, Italy faces a tough slog of slow economic growth, which will make it hard to pay back its debts. And observers say there are concerns about its increasingly cloudy political climate. Some fear that Prime Minister Silvio Berlusconi could lose a crucial confidence vote this month, which could delay needed economic reforms.

The euro zone faces more challenges in the coming days. On Wednesday and Thursday, Portugal and Spain will be selling fresh debt to investors, while the European Central Bank will hold a widely watched meeting on Thursday.

Mr. Riley suggested that one solution for the ECB would be to increase purchases of European sovereign debt, which he described as "small, really, during the crisis."

Morgan Stanley's Mr. Peters said odds are that the ECB will continue its recent stance of declining to prop up the European government-bond markets to any great degree.

"I think they'll disappoint the market and what will ultimately happen is what happened in the spring when the downward pressure on the markets will finally prompt them to take action," he said.

Europe's Crisis Widens

Investors dismissed European leaders' latest attempt to restore market calm, raising doubts about whether governments can rebuild confidence in the region's common currency amid signs that the debt crisis is creeping deeper into the Continent.

The euro fell to a 10-week low, and was below $1.30 in late New York trading. Bond markets across Europe's vulnerable fringe sank, as the "risk premium" investors demand for lending to Spain and Italy hit record highs. Standard & Poor's said after European markets closed it is considering a downgrade on Portugal's credit rating, citing economic pressures and increased risks to the government's creditworthiness.

Cutting Back

Voices from Europe's fiscal crisis.

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Timeline: Ireland's Woes

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Europe's Debt Crisis

Take a look at events that have rattled European governments and global markets.

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The bond selloff extended Monday's declines, suggesting that Sunday's agreement by European governments to bail out Ireland and set up a permanent rescue fund has left investors cold.

Germany and other European governments hoped the twin announcement would end the near-panic that has gripped debt markets in recent weeks. Instead, a crisis of confidence that began last year in Greece has continued to spread.

Particularly worrying to Europe's leaders are early signs the market turmoil is spilling into countries thought to be less at risk: Italy and Belgium. "Tension is very high, in part because the market has already raided three countries," said Luca Cazzulani, deputy head of fixed-income strategy at Italy's Unicredit bank.

Economists generally agree Europe's current bailout fund is sufficient to rescue Spain, should that be necessary. But if Italy, Europe's third-largest economy, teetered, a rescue would test both Europe's economic resources and the will of healthier countries such as Germany to shoulder the costs.

Italy is faring better economically than some neighbors and its budget deficit is among the lowest in the euro zone. But Italy also has the region's second-largest debt burden, and half of it is financed abroad.

In addition to the huge government debt of some countries, especially on Europe's periphery, investors worry banks could face big losses. If problems among banks are greater than disclosed, that would have effects on these countries' budgets—and the size of any bailout they might need.

That concern is driven partly by a lack of trust in the integrity of "stress tests" of euro-zone banks earlier this year. Ireland's passed, yet it was the weakness of those same banks that forced Ireland to seek a bailout.

Now European officials are planning a new round of stress tests next year. While some leaders are pushing for these to be broader and more transparent, the agency that will oversee them says it might opt not to publicly disclose the results.

Paul Vigna discusses how worries about Spanish and Italian bonds are hammering the Euro and have caused shares in Europe to fall sharply.

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Germany stands accused by critics, ranging from financial markets to European capitals, of fueling the current anxiety by insisting Europe's future bailout fund include rules that could see bondholders take a hit in government rescues.

Chancellor Angela Merkel pushed hard for that principle, saying it is unacceptable that investors make profits from lending to governments while taxpayers cover all of the losses. Even some economists who believe she is right in principle say the timing was terrible, because it undermined fragile confidence in European debt markets.

German officials maintain the rules would affect only future bonds, not existing euro-zone debt, which would be repaid in full. But merely talking about the issue of lenders taking a so-called haircut has shattered the assumption that Western European governments never default. By raising the cost of borrowing for Portugal and Spain, this has made it more likely they may need a bailout, economists say.

"By their actions, the Germans have unsettled the markets and brought about what they're hoping to prevent," said Simon Tilford, chief economist at the Center for European Reform, a London think tank.

One reason the prospect of bailouts of weaker governments is no longer enough to win back investor confidence, economists say, is that they don't solve the underlying problem: Several countries have more debt than their economies can cope with.

Their rising cost of borrowing bodes ill for their plans to issue hundreds of billions in new bonds in the coming years. Ireland, Portugal, Spain and Italy need to issue close to €900 billion of government bonds over the next three years—about €500 billion in Italy alone—according to Citigroup estimates.

Some observers say the euro zone will eventually have to choose between unraveling or creating a deeper union that includes financial transfers from strong countries to weaker ones. But creating the central budget authority that the euro-zone now lacks would be a hard sell in countries such as Germany that would have to foot the bill.

On the other hand, giving up on the euro would undermine 60 years of political efforts to build a united Europe, and could cause unpredictable economic and financial disruption in a region whose trade and banking systems have become deeply intertwined since the euro was created in 1999.

Continental Divide

Europe's sovereign-debt crisis is exposing economic fault lines within the euro currency zone

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A paradox of the debt crisis is that the 16-nation euro zone, as a whole, has a budget deficit of around 6% of its gross domestic product and total public debts of around 84% of GDP. While not exactly low—6% is twice what's supposed to be the maximum in euro-zone countries—that is healthier than in the U.S., which is running a budget deficit of over 11% and has total debts of around 92% of GDP.

Germany is forcing Ireland and Southern European countries to pursue painful fiscal austerity policies, in the hope that slashing deficits will win back investors' trust. But many in financial markets doubt the strategy will work, saying that without better economic growth, the euro zone's weaker members will struggle to pay down their debts even with fiscal austerity. That makes many analysts believe the ultimate resolution will involve either a restructuring of debts in some countries or a financial transfer, such as by forgiving rescue loans.

Such transfers wouldn't solve a growing problem that threatens the cohesion of the currency area—economic divergence.

The gaps among countries are widening, suggesting that robust recoveries in northern European nations such as Germany aren't spreading south or to Ireland. Jobless rates are relatively low in Germany, at 6.7%, and below 5% in the Netherlands. But Spain's is over 20%, according to the EU. Others in Europe's periphery have double-digit rates, making deficit reduction hard to do without triggering a backlash.

In a currency union with a single monetary policy and 16 different fiscal policies—and, critically, 16 distinct sovereign bond markets—such gaps matter a lot, economists say.

"These divergences give the markets something to sink their teeth into by attacking individual countries and their bond markets," says Jonathan Loynes, an economist at the consultancy Capital Economics. The divergences mean tiny countries like Ireland and Greece, which combined account for just 4% of the region's output, "are almost becoming pivotal to the financial stability of the region as a whole," he adds.

—Stephen Fidler and Alessandra Galloni contributed to this article.