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F E B R U A R Y 2 0 1 2 / F O R E I G N S E R V I C E J O U R N A L
tutions and their relations within the
European Union are even more so.
Complicating matters, even as the
U.S. and Europe launched a global
G-20 process, they failed to take the
necessary economic policy steps at
As the global financial and eco-
nomic crisis deepened, jittery finan-
cial markets began to question their previous assumption
that the bonds of all euro zone countries were nearly risk-
free. In such turbulent times, investors become much
more attentive to risk, and it was clear that the level of risk
associated with German government bonds was signifi-
cantly less than that associated with Greek, Portuguese,
Irish, Spanish or Italian government bonds. These coun-
tries shared the same currency, but they did not share the
same budget policies or political systems.
Financial markets reflect a balance of greed and fear.
In the past, speculators made billions of dollars by betting
against the European Exchange
Rate Mechanism. Today, greed
drives speculators to seek even big-
ger returns by betting against the
bonds issued by financially weak na-
tions of the European Union, and
against the continuation of the euro
zone. To date, the policy responses
of European leaders have not been
sufficiently decisive, strong or credible to inspire counter-
balancing fears that such speculators could lose their shirts.
In principle, Europeans could wrong-foot speculators
and defuse the euro zone crisis by creating a fiscal union
and strengthening the European Central Bank. Giving the
European Commission the power to issue large quantities
of eurobonds based on the full faith and credit of the E.U.,
and empowering the European Central Bank to buy more
national government debt and serve as a lender of last re-
sort, could have a powerful impact. But instead, many
Germans and Northern Europeans believe that without
The fragility of the
euro zone was compounded
by expansion beyond its
original membership.