The crisis that began in Greece has spread across the continent,to envelope not just other southern European governments,but also the entire eurozones banks. Banks lent heavily to governments; governments spent on propping up their financial systems after 2008; if confidence falters further in the debt they expanded at the time,the banking system will find it difficult to avoid systemic tremors. This strikes Europe hardest because of the peculiar structure of the eurozone,in which a technocratic central bank cannot be relied on to back an individual countrys sovereign debt. Policy response has been complicated by a sense in northern European countries that this is a problem which they bear little responsibility for; this feeds back into investors assumptions about the European Central Banks desire and ability to back eurozone governments as a whole,exacerbating the loss of confidence that is the problem in the first place. Unfortunately,few northern European politicians are telling their voters the truth: first,that a collapse in the euro,or allowing hard-hit countries to leave it,would be deeply problematic for their banks,companies and societies; and second,that given the role of some northern European banks particularly in France in propping up southern European spending,it is hardly the case that responsibility lies solely south of the Pyrenees and the Alps. The only answer is to commit support to those governments that might be illiquid but solvent Italy and Spain and to restructure the debt obligations of Greece,that might actually be insolvent. This would involve a hefty bank recapitalisation,credible and effective only if backed by northern European resources. The essential solution is to demonstrate to those worrying about European stability that the eurozone will endure this crisis the only way it actually can: through the twin solutions of greater integration and faster growth. Greater integration means,in essence,the harmonisation of fiscal policies,so austere Germany and profligate Greece do not again diverge so strongly in their approach. And governments will only be strengthened if their revenue stream appears sufficiently buoyant: which would require them to focus on growth-increasing reform and,incidentally,to abandon any pretence at austerity. This is necessary for Europe; but it would have the beneficial byproduct of being an additional engine for the world economy as a whole.
