The Folly Of Prudence Countries of southern Europe may be on way to collapse, but it would be worse if they tightened their belts

He said that the Euro was an incomplete currency to begin with; the European Union created a common currency, but not a common treasury. So every member country was free to run whatever deficits it liked, and to run up any level of national debt. The market ignored this because the European Central Bank was prepared to buy the bonds of any member government. It preferred the bonds of southern European countries because they ran bigger deficits and hence paid higher interest. European Banks stacked up on these bonds; of the Spanish sovereign debt of a trillion Euros, a half is held by French and German banks. Hence if a south European country reneges on its debt, the banks of the strongest countries would get into trouble: they cannot afford to let their banks fail, and would be bound to bale them out. That is why Germany baled out Greece, and would have to bale out Spain and Italy if the government of either failed to honour its debt repayments