August 04, 2011
The Post forgot to mention the role of the European Central Bank (ECB) in worsening the European debt crisis. The original crisis stemmed from the failure of the ECB to notice and respond to the huge housing bubbles that were driving the economies of countries like Spain and Ireland.Instead, it allowed these bubbles to grow to sizes where their collapse would inevitably sink the economy.
However, the ECB has compounded this damage by its limited response the downturn. It never pushed its overnight money rate below 1.0 percent, in contrast to the zero rate at the Fed. It also was more cautious in it quantitative easing policy and now is actually raising rates, ostensibly because it fears inflation.
Higher interest rates will worsen the debt situation for two reasons. First, it will tend to put upward pressure on the interest rates that countries must pay on their debt. Second, it will slow growth. Slower growth will mean reduced tax revenues for debt burdened countries and higher payments for unemployment insurance and other benefits.
Anyone reporting on the course of the debt crisis of the Euro zone countries has to give the ECB a starring role.
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