Financial Times
October 5, 2011
Europeans, and with them the rest of the world, are discovering what all doctors know – a persistently misdiagnosed and incorrectly treated infection can eventually threaten even the healthiest part of the body, thus requiring more drastic medical intervention whose effectiveness is less assured.
This is what is happening in Europe today. A debt and growth crisis in the outer periphery of the eurozone (Greece) has been allowed to destabilise the inner periphery and the outer core (Ireland, Italy, Portugal and Spain). In addition, signs of dislocations are now visible in the inner core – both through the banking system and directly.
In the last few weeks, European banks have come under increasing market pressure. In one case, that of Dexia, governments are being forced to counter worrisome fragility. Moreover, as recognised by policymakers, a banking system that previously was just on the receiving end of the sovereign debt crisis (because of large holdings of peripheral debt) now risks becoming a standalone source of disruptions – multiplying the policy challenges.
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