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| Jean-Claude Trichet: this is the most severe economic situation that Europe has faced "since WWII, possibly even WWI" |
Last month the eurozone sovereign debt crisis reached a stress point that threatened to blow the euro currency system apart. Although I don’t think this will happen, the euro suffered a serious credibility deficit. European leaders rushed to plug the gap in the sovereign debt dykes that had been breached by bond investors. They came up with an emergency financing package designed to convince markets that they cannot win in forcing any eurozone state into defaulting on its debt.
Initially, markets were wowed by the size of the package – but not for long. After all, the EMU leaders have merely heaped up more debt and applied it to a problem that is about too much debt. The solution to a hangover is not more alcohol.
The other shock was the decision to involve the independent European Central Bank in the financing package. The ECB has now started to buy the potentially toxic sovereign bonds of Greece, Portugal and the others from Europe’s banks.