July 24, 2012
Europe’s leaders were hoping their debt crisis had taken a break for the summer. On Monday, financial markets announced they were in no mood to relax.
Spanish bond yields surged to new highs, forcing the European Union to contemplate its fourth and biggest sovereign bailout, after Greece, Portugal and Ireland. On top of this, fear that Greece might have to leave the euro mounted again, after reports that it won’t meet the terms of its latest aid program. Italy and Spain announced emergency curbs on short- selling of securities. Investors hammered stocks on both sides of the Atlantic -- a reminder, if anyone needed it, of the global ramifications of this crisis.
It’s worth recalling that the problem is far more tractable than the EU’s leaders have made it seem. There’s no mystery about what needs to be done. The European Central Bank must act as lender of last resort to the euro area’s distressed sovereign borrowers. The ECB, with its power to print money, has the technical means to take on this role. It lacks the political and (some insist) legal authority to act. European leaders’ unwillingness to resolve these issues keeps bringing the global economy back to the edge of the abyss, and this week it looks again as if it might fall.