Europe’s banks and national governments are locked in a vicious cycle. Weak banks are dragging down governments, while weak governments are dragging down their nations’ banks. Picture drowning swimmers trying to climb up on each other’s shoulders. Investors are reacting by driving up rates on both public and private borrowings, making the problem worse. Economists say Europe is in a “doom loop.” The consequence “has been to transform isolated sovereign debt crises into systemic bank crises, and to transform isolated national bank crises into systemic sovereign debt crises,” Perry Mehrling, an economist at Columbia University’s Barnard College, wrote in a June 19 blog post.
Something has to be done, and urgently. But there are few ideas for saving Europe that don’t run into a wall when they reach the Bundeskanzleramt, the Berlin offices of German Chancellor Angela Merkel. While Merkel is committed to saving the euro currency and the European Union, she says Germany won’t open its wallet more to ease the crisis until European nations submit to centralized control of their national budgets—that is, surrender a big part of their sovereignty.