There seems to be some good news from Europe. Markets have reacted well to European Central Bank president Mario Draghi's speech yesterday and the euro is at a two month high. Draghi's speech yesterday introduced a new bond buying mechanism that aims to lower the borrowing costs for countries like Spain and Greece.
Austrian school economist Detlev Schlichter has outlined why the optimism could be short lived:
The markets' initial response is somewhat silly, in my opinion, albeit not entirely surprising. Equities are rallying hard, in particular bank stocks. So does government debt. The euro is stronger versus other paper currencies because the risk of breakup has allegedly receded. But breakup looked unlikely even before.
In fact, no response was needed. Nothing material has changed. Like the central banks in Britain and the US, the ECB will now actively and directly support government debt with the printing press but this was sooner or later inevitable anyway.
Schlichter also highlights how removed central banks and governments are from the economic laws that govern most people's lives:
It is a matter of logic that anybody who habitually spends more than he earns and borrows the difference puts himself at the mercy of his creditors. When those lose faith in him, he will be unable to roll over his debt or borrow more, or may only be able to do so at punitively high rates. That is the flipside of living constantly beyond your means, of going ever more into debt. You need somebody to fund such extravagance. When your lenders lose trust in your ability to repay, it is 'game over'.
But in our system of unlimited fiat money this does no longer apply to banks and governments. For these two entities it doesn't matter what the investors and depositors – 'the market' – think or feel. In these cases, the central bank bureaucracy assumes the role of ultimate decision-maker.
As well as the economic worries, there is also a political reality to consider. The new mechanism requires that the countries that want their borrowing costs lowered implement austerity measures. Austerity measures might be hard to sell to citizens of the most affected countries. Graeme Leach, Chief Economist at the London-based Institute of Directors, summarized this concern succinctly:
The ECB's decision to enter secondary bond markets could be the game changer the IoD has long argued for. But there's a hitch. ECB action is conditional and depends on countries such as Spain signing up for even more austerity. The key question is whether more austerity is politically possible with 25pc headline and 50pc youth unemployment.
For all of the initial optimism it still looks like a euro crisis is as far away as ever from a comprehensive solution.