EDITORIAL: Debt crisis in Europe

Financial unrest in Europe stemming from the fiscal crisis in Greece triggered turmoil in global financial markets. Europe and the rest of the industrial world are now trying to tackle the problem through coordinated efforts. But their ability to deal with the crisis has really yet to be tested.

Greece is not the only European country that is mired in fiscal woes. There is also major concern about European banks that hold huge amounts of government bonds issued by the affected countries.

Financial markets feared another global credit crunch could be in the making if banks, due to mutual mistrust, stopped lending to one another.

Clearly, the major economic powers must work together to prevent the crisis from spreading globally. At the same time, Europe must make an all-out effort to overcome structural weaknesses of the euro zone. Despite considerable progress toward economic integration, it is difficult for the member countries to demonstrate political unity.

After much diplomatic wrangling, the euro-zone countries of the European Union and the International Monetary Fund agreed last week to provide a total of 110 billion euros (about 13 trillion yen, or $140 billion) in loans to help Greece ride out its debt crisis. But the deal failed to calm the unnerved markets.

Then, the 27 EU countries held an emergency meeting and agreed to set up a fund worth 500 billion euros as part of a rescue package that could provide up to 750 billion euros, including aid from the IMF, to cash-strapped countries.

In a concerted move, six central banks--in Europe, North America and Japan--jointly intervened to provide an ample supply of dollars to money markets where banks lend and borrow short-term funds.

The measures are reminiscent of the steps taken in response to the global financial crisis triggered by the failure of U.S. investment banking giant Lehman Brothers in the autumn of 2008. This time around, the central banks acted out of fear the situation could develop into a replay of the "Lehman Shock," which pushed the world into synchronized recession.

The measures already announced are vital for preventing the turmoil in financial and stock markets from deepening further. The concerted actions taken by leading countries should restore stability in the markets and ensure that the continuing recovery of the world economy will not be hampered.

There are, however, some factors that argue against optimism. Markets are now worried not only about the short-term prospect of inter-bank lending but also about Greece's ability to repay its debt.

There are lingering concerns among investors about heavy losses from their investment in Greek government bonds. They fear that Greece may fail to regain fiscal health and default on its debt despite the massive financial aid.

Their fears are by no means groundless, given the size of the country's public debt and weak industrial base. Jitters about Greece inevitably arouse anxiety about other vulnerable countries, such as Portugal and Spain.

These doubts and concerns won't go away unless a real solution is found to one formidable challenge facing euro-zone nations: how to rein in freewheeling public spending by members.

The current crisis should prompt the EU to start moving toward establishing an effective system for fiscal policy coordination within the region. That would be a fresh step toward federalizing the euro zone. If EU members share such a vision, efforts to create a mechanism to prevent a global financial crisis will make progress.

--The Asahi Shimbun, May 11