The euro zone on the brink

What happened

A euro zone bailout of Spain’s debt-stricken banks failed this week to calm growing panic that the euro could be about to unravel, as investors pushed Spain’s borrowing costs to ruinous levels and Greece faced an election that could force its exit from Europe’s common currency. The $125 billion aid package was intended to strengthen Spain’s teetering banking sector—which is loaded with toxic assets following the collapse of a housing bubble—and prevent the region’s fourth-largest economy from falling deeper into recession. Spanish Prime Minister Mariano Rajoy hailed the bailout as a “victory” for both Spain and Europe. But markets remained pessimistic. The rate on Spanish 10-year bonds—a measure of how much investors trust a country to repay its debts—shot up to 6.7 percent, a level that compelled Greece, Portugal, and Ireland to seek bailouts, and could lead to Spain’s bankruptcy.

Yet more turmoil could be triggered by Greece’s election on Sunday. The far-left Syriza party, which is polling even with the conservative New Democracy party, has vowed to abandon austerity measures demanded by the European Union if it gains a majority in Parliament. That could lead euro zone leaders to pull the plug on further aid, forcing Greece out of the euro. Syriza leader Alexis Tsipras warned European leaders that kicking Greece out of the currency would trigger a catastrophic loss of confidence in other European countries’ solvency, and set off a euro zone meltdown. “The fire will become unquenchable and will not be limited to Greece,” he said.

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What the editorials said

Only one thing will save the European economy now, said The Washington Post. The Continent’s healthier nations—particularly Germany—must put together an equivalent of the massive, confidence-inspiring Troubled Asset Relief Program that saved U.S. banks from imploding in 2008. But the Germans “are still hesitant to co-sign eurobonds for their debtor neighbors,” and all other remedies are but temporary Band-Aids. This week, interest rates on Italy’s bonds also soared, to 6.2 percent—and the investors’ lack of faith is spreading. “There isn’t much time left.”

This is the price Europe has to pay for the “original sin of bailing out Greece,” said The Wall Street Journal. Bureaucrats in Brussels and Berlin originally claimed that overspending Athens couldn’t be allowed to fail, “because default would lead to contagion to other countries, a European recession, and perhaps to the breakup of the euro zone.” But two years and three bailouts later, where are we? “Europe is in recession, and contagion has spread to Spain, and perhaps next to Italy.”

What the columnists said

The immediate threat is a Greek exit from the euro zone, said Abdur Chowdhury in the Milwaukee Journal-Sentinel. If an anti-austerity government takes power, and the country quits the euro and returns to a devalued drachma, terrified depositors in Spain, Ireland, and Italy will make a run on the banks. Then the euro’s collapse will be all but inevitable. President Obama’s fate is tied to Europe’s, said Dana Milbank in The Washington Post. He’ll be re-elected only if “voters perceive the economy to be improving.” But a severe downturn across the Atlantic would cause American exports to Europe to plummet and global markets to crash, dropping the U.S. back into recession.

Germany faces “an agonizing dilemma,” said Niall Ferguson in Newsweek. It must either agree to fund a strong central European bank, and thus, absorb its southern neighbor’s debts, or see the euro zone collapse. The collapse would destroy the market for nearly half of Germany’s exports and cost the country hundreds of billions of euros. “After two years of procrastination, Europe has reached the moment of truth.”

All the signs are bad, said Joe Nocera in The New York Times. Economists insist that “Europe needs tighter political and fiscal integration to save the euro,” but the euro zone consists of 17 nations—and “sovereign governments, it turns out, do not willingly cede their sovereignty.” Most Europeans would “rather risk financial disaster” than surrender their national identities and truly marry their economies, debt, and governments. Unless Europeans have a quick change of heart, the euro is doomed.