Central banks' safety net won't save Europe from austerity

COMMENTARY Central bankers are hugging out their economic woes, sending stocks surging. But for how long?

News that the U.S. Federal Reserve, European Central Bank, Bank of England and other monetary authorities around the world are joining forces to boost global economic growth pushed morning trade on the Dow Jones Industrial Average up more than 400 points. Big banks saw especially large gains, with Deutsche Bank (DB) up 8.5 percent; JPMorgan Chase (JPM), 6.4 percent; and Morgan Stanley (MS), 7.2 percent. Equity markets in Europe and commodity prices also jumped. Said the central banks in a joint statement:

The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

In other words, we're there for you. The six central banks involved in the coordinated action are effectively vowing to pump U.S. dollars into the global financial system by lowering borrowing costs for banks wobbled by the European debt crisis. And it's about time. Recent signs make clear that the contagion is spreading to the eurozone's healthier economies, including weak investor demand for ostensibly safe German government debt and soaring bond yields in Italy. 

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The move to ease funding pressures on vulnerable financial institutions doesn't directly address the key factors driving the sovereign-debt crisis in Europe. Nor, on its own, is it sufficient to spark economic growth -- not when countries across the region are intent on slashing public spending even amid flagging private-sector demand. But at least some prominent investors interpreted Wednesday's action as an indication that central bankers are finally, if belatedly, drawing a line in the sand:

"The central banks of the world have resolved that there will not be a liquidity shortage," said David Kotok, chairman and chief investment officer of Cumberland Advisors. "And they have learned their lessons from 2008. They don't want to take small steps and do anything incrementally, but make a big bold move that is credible."

The problem is with what financial markets view as "credible." Certainly, backstopping European banks buys time for leaders in the eurozone to thrash out a bigger, bolder solution to the crisis that what has already, and ineffectually, been deployed. If economies melt down quickly, politics creep along like molasses. Now it's up to German Chancellor Angela Merkel to use that time wisely.

But the eurozone's fundamental challenge isn't shoring up investor confidence. It is, to underline the obvious, to boost economic growth while keeping the trading bloc from collapsing under its own debt. For now, that looks like a bridge too far. The eurozone's projected growth next year is 0.5 percent, even as member states continue preaching the gospel of austerity. Merkel also continues to reject sensible, if politically sticky, approaches such as using so-called Eurobonds to pool regional debt. Writes economist and CBS MoneyWatch contributor Mark Thoma:

[N]ote that while this move can ease financial market conditions, it does nothing to address the underlying problems creating those conditions. So this is no substitute for the difficult decisions that Europe must make to overcome its troubles.

Given these daunting economic and political obstacles, investors could easily interpret the latest monetary measures less as a sign of central bankers' resolve to address the situation than of something else -- desperation.

  • Alain Sherter On Twitter»

    Alain Sherter is an award-winning business journalist who has written for The Deal, MarketWatch and Thomson Financial Media.

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