Euro crisis demands action
Occupy Frankfurt protesters at a symbol of the euro at the European Central Bank in Germany (Oct. 29, 2011) Credit: Getty Images
Not so fast.
Sure, consumer confidence surged in November, and retailers posted strong sales for the hectic shopping days after Thanksgiving. Yes, the latest report from payroll processor ADP showed unexpectedly strong jobs growth. There was even some good news on housing: The number of Americans signing home-buying contracts jumped in October, to the most in a year.
The ebullience went global when six leading central banks, including our own Federal Reserve, reacted to the ongoing euro crisis by joining forces to lend dollars more cheaply to foreign banks.
Stocks rose sharply yesterday on these wonderful tidings. Yet it's hard not to see such exuberance as irrational, for the eurozone debt crisis grows worse with each passing day. And right now nothing else matters much by comparison.
Indeed, the coordinated central bank action is a sign of just how serious things are. European banks, afflicted with suddenly dubious IOUs from Italy, Spain, Greece and one another, are finding themselves increasingly starved of funds for the simple reason that others are afraid to lend to them. If the banks can't borrow, they can't lend, and so credit, the lifeblood of business, is drying up in Europe.
With money scarce and European governments frantically cutting spending, much of the continent is probably already in a recession, which will only make its debts harder to repay. The Italian government, meanwhile, is considered such a bad risk that it has had to pay nearly 8 percent to borrow -- a rate Rome can't afford for long. Yet Germany, a bulwark of solvency whose economy benefited from the borrowing and spending of its eurozone partners, remains opposed to assuming significantly more of the continental debt burden. Throughout, European leaders confronted by this contagion have acted like medieval physicians, prescribing a uniquely toxic blend of high-level meetings and fiscal austerity that is sure to strangle patient and doctor alike.
It may be too late to head off national defaults and bank failures on the continent, but it's desperately important that European leaders try something more potent than talk and less harmful than austerity. Orderly defaults by the hopeless -- such as Greece -- would help. Massive bond-buying by the European Central Bank might protect the rest, and although not strictly allowed, ought to be permitted and tried. Bonds backed by the entire eurozone could lower the rising borrowing costs that now threaten Italy as they did Greece, if only the Germans would agree. Their worries about getting dragged down by the others are understandable, but a chaotic eurozone collapse would engulf Germany in any case, so why not accept a little pain now to fend off a great deal more later?
That pain would not be confined to Europe. Rest assured; if the euro dam bursts, the resulting deluge would swamp whatever green shoots the American economy has been sending up lately, and investor euphoria will be drowned right along with them.
