European leaders have begun edging toward the only realistic solution to the continent's debt and banking crises: refinancing unpayable government debts and reinforcing weakened banks. If their monetary and political union is to survive, all members must start acting less like jealous sovereign states.
Unless they quickly convince financial markets that they are ready to stand together, Europe risks a spiral of disasters, including a Greek default and the failure of major debt-weakened banks. If things get bad enough, the euro zone -- and the entire European Union -- could fracture.
The United States would not escape. A collapse in Europe would sap confidence in global markets and shrink demand for exports when Washington is struggling to avoid a double-dip recession.
President Obama and his aides must keep their public comments upbeat to avoid further spooking the markets. But during his trip to Europe, Treasury Secretary Timothy Geithner must be blunt behind closed doors that there is no more time to waste.
Europe must show it will lend as much as needed to debtor countries and weakened banks that are shut out of private credit markets. That was supposed to be the job of a strengthened bailout fund, but all 17 euro zone countries must approve it. For now, the lending still must come from the European Central Bank.
German politicians, who pocket the benefits their country draws from an economically united Europe, object to the rising costs. With Greece sinking, panic spreading, and banks -- including German banks -- hurt by losses from past careless lending, it is a little late for that. If German Chancellor Angela Merkel means what she says about standing by the euro, she must face down the critics.
Europe also must rethink its demands for punitive austerity as the price for bailout loans. Athens needs to pare down its bureaucracy, improve tax collection, and liberalize its labor markets. But Greece will never work off its debt if its economy keeps shrinking.
Germany, Europe's economic powerhouse, could temporarily cut taxes. That would increase domestic demand and imports from Greece and other indebted countries that need new markets. But fearing the ghosts of long-ago inflation more than the spread of present-day depression, Germany is resisting.
A lasting solution will require restructuring unpayable debts by writing down principal, lowering interest rates, and extending maturities. Common European bonds, taking advantage of lower interest rates available to Europe as a whole, should be part of the process.
That is more unity than the rich northern European countries want. But nothing less will get Europe out of this mess.
-- New York Times