Tuesday, December 20, 2011

Why Politicians Are Helpless In Euro Crisis

Such is the scale of the eurozone's problems, Fitch ratings has dashed any hope that Angela Merkel might do a Wonder Woman twirl and unleash a Big Bazooka with enough financial firepower to end the debt crisis once and for all.

"Fitch has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach," it said as it warned Spain, Italy, Ireland, Belgium Slovenia and Cyprus that their credit ratings would soon be downgraded.

The "positive commitments" made by European leaders towards more disciplined borrowing and spending limits agreed at last weekend's summit were welcomed.

But even in the unlikely event of the eurozone's 17 members coming together in a United States of Europe style union, in which richer states subsidised the poorer, its credit rating would still be far from perfect.

That is because the backbone of Europe's financial infrastructure, the European Central Bank (ECB), still cannot and will not do what the Bank of England and US Federal Reserve can - lend money to their own governments in case of emergency.

It is what people in the know call a "financial backstop". Read More