Wall Street Journal
November 23, 2011
The poor response to Germany’s latest bund auction is a worrying sign.
It suggests that the malaise affecting bond markets across the euro zone’s periphery could finally be infecting the heart of the core.
To see why, it’s worth thinking about the nature of the euro-zone’s problem. If you were to boil hard, it reduces to this: who pays for the large amounts of debt built up by the countries at its periphery during the good times?
The European Central Bank and the core want the borrowers to make good through a lot of belt tightening. The periphery says it can’t pay. Either the lenders at the core have to eat their losses through defaults, which means banks going bust, or the losses have to be spread across savers, which means inflation.
The ECB is adamant it will not inflate the problem away. There is enough money in the euro zone for governments to resolve the problems themselves. Debtors need to pay a substantial part of what they owe. And creditors need to take some losses.
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