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European leaders must still make drastic changes

Diane Swonk Dec 1, 2011

Jeremy Hobson: Well the global stock market rally that sent the Dow up almost 500 points yesterday may be over, but France and Spain are offering some hope this morning that yesterday’s coordinated action by central banks to ease credit is working. Both countries saw their borrowing costs fall in big bond sales.

For analysis, let’s bring in Diane Swonk, chief economist with Mesirow Financial. She’s with us live from Chicago as she is every Thursday. Good morning.

Diane Swonk: Good morning.

Hobson: So Diane, we’ve had 24 hours to digest this central bank news at this point, and I still want to know why they decided to do this now. Was a there a big bank about to fail in Europe or something like that?

Swonk: Well, there are several banks that are close to insolvency in Europe, particularly in France. That said, we saw movement by the European Union and eurozone officials to try to get this pact together — they’ve now got nine days to go. It’s a much more coordinated pact and move toward unity, that opened the door for the central banks to come in and help shore up liquidity in the region and make it easier for the banks to continue to get money to fund loans in the region. And that was a big deal.

It was also important that, frankly, we opened swap lines. What that means was our Federal Reserve — our central bank — and central banks around the world said they were willing to take the euro in exchange for their own currency to deal with the crisis and that means a confidence — a back-door confidence — in the fact that the euro will survive.

Hobson:And this allows European leaders some breathing room to make the decisions they need to make to sort of get this debt crisis under control. What is next for them? What do leaders of these European nations need to do to at this point?

SwonkWell, the next step of course is the next short-term step, and that is in nine days coming up with some reforms that show more teeth to it, more austerity, and more structural reforms in Europe so that Europe can move in unison together. If they can do that, they can provide some funding for some of the states — the sovereign states that need it so badly in a more coordinated way.

And the European Central Bank can get in it if they come up with a plan that’s more coordinated. That opens up some legality issues for the European Central Bank. That said, this is still years in the making for the eurozone to really save itself. You’ve got to get 17 individual different countries over the next few years to rewrite their constitution and agree to it. It’s kind of like corralling cats.

Hobson: Diane Swonk, chief economist with Mesirow Financial, thanks so much for that.

Swonk: Thank you.

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