Michael Spence, professor of economics at New York University’s Stern School of Business thinks the risks in Europe needs socialization in the short-term. The Eurozone is going to stand or fall depending on the reforms they undertake in Spain or Italy.
Unfortunately, those reforms will take time to show the results. Borrowing costs however remain the dominant problem right now and to bring the sovereign yields of Spain and Italy down, the intervention of core European institutions and the IMF are required as the reforms are initiated. In order to do that, they would need to keep buying peripheral bonds, which involves socializing the risks involved.
The Federal Reserve’s latest move to extend the Operation Twist through the end of the current year had barely any impact on the markets; it was a non event which basically suggests that central banks are running out of monetary tools that can offer solutions.
