Wall Street Journal
September 22, 2011
Earlier this year, as the rising waters of the Mississippi River threatened to engulf towns along river banks, the U.S. Army Corps of Engineers made the difficult decision to open emergency spillways, diverting floodwater into farmland to relieve the pressure.
Today, the European financial system finds itself in a similar position to those riverside towns. It's time for European leaders to open the spillway.
The opportunity to "fix" the finances of much of the European periphery, especially Greece, has passed. The folly of extending more credit to a highly indebted country with no prospects of ever paying it back is obvious. Despite the euro zone's expanded credit facilities, financial markets are still pricing in a 100% probability of a Greek default. Compounding the problem, the Greek economy contracted by another 7.3% last quarter.
European officials' first line of defense against the debt crisis's rising tide was to attempt to erect "levees" around the troubled sovereigns. The European Central Bank has been buying the bonds of peripheral countries where confidence has collapsed, while euro-zone nations have funded the European Financial Stability Facility (EFSF) up to the amount that voters in core economies are likely to tolerate.
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