FT columnist Martin Wolf is worried - not only by the legitimate questions that have been raised about European debt, but by all the "what ifs" that no one has good answers for.
In a panic, fear has its own power. To assuage it one needs a lender of last resort willing and able to act on an unlimited scale. It is unclear whether the eurozone has such a lender. The agreed funds that might support countries in difficulty are limited in a number of ways. The European Central Bank, though able to act on an unlimited scale in theory, might be unable to do so in practice, if the runs it had to deal with were large enough. What, people must wonder, is the limit on the credit that the Bundesbank would be willing (or allowed) to offer other central banks in a massive run? In a severe crisis, could even the ECB, let alone the governments, act effectively?
Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it. In the eurozone, they are failing to do so.
Today's stock market rally, while a relief after so many down days, raises another question: Why now? Apparently Wall Street is responding to vague assurances from the European Central Bank president and the Atlanta Fed president that governments were on the case. That the markets can react so strongly to such flimsy comments tells you a little something about investor skittishness.