Kinder, gentler EC

• Tweet

Wall Street markets jumped Tuesday on hints that Greece might not exit the eurozone, revealing investor jitters just as clearly as bad news might.

Wednesday, the European Commission reported what has become familiar news: Spanish banks are in trouble; Italy is doing better than expected; Germany, despite a steady economy, should not become complacent. The report details the fiscal crisis country by country and said the commission would press forward with an attempt to forge a common bond for the eurozone -- the 17 countries that use the euro as currency. It also recommended a region-wide union for banks, The Wall Street Journal reported.

The idea, of course, is to achieve bank recapitalization without the indiscreet penalties that come with missing fiscal targets.

The theme of austerity budgeting has now given way to kinder, gentler austerity budgeting. Considering eurobonds, "The net effects of common issuance will be positive only if the potential disincentives for fiscal discipline can be controlled," the commission said. At the same time, "The main challenge for fiscal policy is to pursue fiscal consolidation in a growth-friendly manner," the report said.

You can't have it both ways, unless, of course, there is a hint at politics in your job description. At that point, like the Scarecrow advised in the Wizard of Oz, "some people do go both ways."

The distinction falls to Spain at the moment. The commission said proposals submitted by Spain "lack sufficient ambition to address the challenges identified."

The commission called on Spain to reduce its debt through "fiscal consolidation and fiscal discipline" but noted Spain is facing an uphill battle. It's troubles are well known. The housing bubble collapsed, leaving bank assets high and dry. The unemployment rate is the highest in Europe. Yields on benchmark 10-year bonds in Madrid are currently at 6.61 percent, compared to similar bonds in Germany that yield 1.38 percent.

The Wall Street Journal said Wednesday that the commission was also considering relaxing fiscal targets for some countries.

"Member States which face high and potentially rising risk premia do not have much room for maneuver to deviate from their nominal fiscal targets, even if macroeconomic conditions turn out worse than expected," the Commission said.

Two fears loom large. The first is investors will see backing away from fiscal discipline as a poor decision. The second is that countries in Europe are unlikely to dip into a collective rescue fund if it means investors send their borrowing costs higher.

In international markets Wednesday, the Nikkei 225 index in Japan gave up 0.28 percent, while the Shanghai composite index in China lost 0.21 percent. The Hang Seng index in Hong Kong shed 1.92 percent. In India, the BSE Sensex index lost 0.77 percent.

In Australia, the S&P/ASX 200 lost 0.49 percent.

In midday trading in Europe, the FTSE 100 index in Britain sank 1.52 percent, while the DAX 30 in Germany lost 1.13 percent. The CAC 40 in France lost 1.58 percent, while the Stoxx Europe 600 lost 1.03 percent.