Europe’s Banks, Europe’s crisis

Europe’s policy makers have let themselves been misled by politically convenient views of the crisis, first believing that all problems came from the US, and now blaming reckless fiscal policy by the eurozone's southern members. But the real problem is the EU's weakly capitalized banks, which are so interconnected that problems in one country quickly jeopardize the entire system.

BRUSSELS – Europe continues to constitute the epicenter of Act II of the global financial crisis, which has now mutated into a sovereign-debt crisis within the eurozone. How could this happen when, at least on paper, all problems had seemingly been resolved during May’s extraordinary EU summit meeting, which created a European Financial Stability Facility (EFSF) and ensured total funding of close to $1 trillion?

Those May promises have, in the meantime, been made more concrete. A “special purpose vehicle” (SPV) has been established in Luxembourg, and can already count on hundreds of billions of euros in guarantees from member states.

If all the resources promised (€750 billion, including financing from the International Monetary Fund) were to be used fully, the EU could fully refinance all distressed countries (Portugal, Spain, and Ireland) for a couple of years. Moreover, the European Central Bank has shown willingness to buy government (and private) bonds if it judges that the functioning of the market has been impaired.

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