In a bid to save the European Union economic zone from a credit crisis resulting from worries about government debt, central banks around the world–including the U.S. Federal Reserve–have made borrowing dollars cheaper for European banks.
China was also involved in the rescue effort, lowering capital requirements on its own banks in order to increase liquidity. The Dow Jones Industrial Average surged nearly 500 points, or over 4 percent, on the news of the central banks’ intervention.
It is too early to tell whether this rescue effort will succeed where others have failed. Heavily-indebted nations such as Greece have depended on deals for assistance from Germany. However, the recent spike in Italian bond yields suggests that it, too, may be in trouble–at a scale that Germany and other leading European economies cannot manage. In the past several days, debt fears have even spread to Germany itself.
In each of these countries, spending cuts and other austerity measures aimed at restricting unsustainable postwar welfare states have met with steep political resistance from entrenched interests and populist constituencies. That fundamentally political problem is not one that the world’s central banks can resolve.