“The Federal Reserve and other major central banks moved on Wednesday to help foreign banks more easily borrow and lend money, seeking to forestall a breakdown of global financial markets and giving Europe more time to wrestle with its debts. The latest round of interventions by central banks, including the expansion of an existing Fed program that lets foreign banks borrow dollars at a low interest rate, reflects growing concerns that Europe’s financial problems are hampering growth…

“But policy makers and analysts were quick to caution that the Fed’s action did not address the fundamental financial problems threatening the survival of the European currency union. At best, they said, efforts by central banks to ease financial conditions could allow the 17 European Union countries that use the euro sufficient time to agree on a plan for its preservation…

“European leaders, increasingly concerned by a deteriorating financial picture, said Wednesday they were forming a plan to convince markets that the debts of nations like Italy and Greece were not overwhelmingly large and to set new rules to constrain borrowing by euro zone members. They pointed to a scheduled meeting in Brussels on December 8-9 as a looming deadline for those efforts…

“The Fed will now offer money at lower cost to European banks than to American banks, which pay a rate of 0.75 percent at the Fed’s emergency lending discount window. The difference reflects the reality that European banks are in much more trouble.”

“Mr. Rogoff said, ‘the Europeans can stretch it out a long time, they have the money.’ Nevertheless, he said, they ‘need to take a big step toward economic and political union, whoever wants to be a part of it.’ Germany ‘is right to hold out for systemic changes,’ he said. ‘The Europeans hoped to have 30 to 40 years to integrate more fully. Right now they don’t have 30 to 40 weeks.’…

“‘While treaty change can be a lengthy process, the hope is that the effort will create enough momentum for economic convergence and discipline that will provide the political cover for Germany’s leaders to allow the European Central Bank to step in much more forcibly to defend Italy and Spain and try to stabilize the market.

“But experts say it may already be too late for that plan to work.

“New rules for discipline may help prevent future maladies, but they are a distant cure for the current disease. New disciplinary rules do little to address the structural flaws in the euro zone, where countries of very different economic levels, models and export potentials share the same currency, creating persistent trade and credit imbalances. Structural reforms inside countries, no matter how valuable in the long run, take a long time to work. And austerity alone cannot produce economic growth, which is the main cure for too much debt.”

“Mario Draghi, the ECB’s president, called on the 17 nations of the euro zone to embrace a new fiscal pact that could see countries effectively forfeit independence over their budgets, and potentially give their neighbors the right to veto national spending and slap penalties on big spenders. If such a pact were struck, he hinted, the bank would be ready to play a bigger role in helping stem the crisis – a move that economists and investors say is neccessary…

“Guntram Wolff, deputy director of the Brussels-based think tank Bruegel, said the many options included a surrendering of independence over national budgets. Such a move could allow for the issuing of regional ‘euro bonds’ — much like U.S. Treasurys — that would ensure ‘if Greece doesn’t pay its bills, then the German taxpayer will.’…

“‘Europe is not a choice; Europe is a necessity,’ [Sarkozy] said. ‘If Europe does not change fast enough, history will be made without Europe.'”

“The ungenerous interpretation of the Fed’s action goes like this: Everybody knows the jig is up, but lo these many years after the 2008 crisis, trillions in bailouts later, the banks are still in weak shape, we haven’t really reformed our financial rules, there’s insufficient transparency to really know what kind of shape everybody is in, and the world’s biggest banks just got downgraded on Tuesday. We’re buying time and hoping for the best, and giving all our favorite bankers an extra little margin of error to get their acts together before the big kaboom gets heard ’round the world…

“But here is what is beyond debate: Europe has not solved its fiscal problems. Europe shows no sign of being on the verge of solving its fiscal problems. Europe shows no sign that it wants to solve its fiscal problems. If Ben Bernanke is having ‘in for a penny, in for a pound’ thoughts, he needs to think again: We do not have the resources to bail out Europe, and nobody has the resources to bail out the United States.”

“It is said in Europe that only one politician now stands between President Obama and reelection: Angela Merkel. This may overstate Obama’s electoral strength, but it appropriately recognizes the German chancellor’s current influence. The health of the world economy, including our own, increasingly depends on the vision and decisiveness of a cautious German leader…

“For the United States, these developments have the historical feel of the 1910s and the 1930s, transposed to the economic realm. U.S. interests, once again, depend on European events over which we have little control.

“The world economy is coming to grips with a fact it has long attempted to ignore. The European project, as currently constituted, is unstable. Europe will dramatically strengthen its fiscal and political union or it will break into pieces.”

Via Reason.