The Foreign Service Journal, February 2012

F E B R U A R Y 2 0 1 2 / F O R E I G N S E R V I C E J O U R N A L 21 tutions and their relations within the European Union are even more so. Complicating matters, even as the U.S. and Europe launched a global G-20 process, they failed to take the necessary economic policy steps at home. As the global financial and eco- nomic crisis deepened, jittery finan- cial markets began to question their previous assumption that the bonds of all euro zone countries were nearly risk- free. In such turbulent times, investors become much more attentive to risk, and it was clear that the level of risk associated with German government bonds was signifi- cantly less than that associated with Greek, Portuguese, Irish, Spanish or Italian government bonds. These coun- tries shared the same currency, but they did not share the same budget policies or political systems. Financial markets reflect a balance of greed and fear. In the past, speculators made billions of dollars by betting against the European Exchange Rate Mechanism. Today, greed drives speculators to seek even big- ger returns by betting against the bonds issued by financially weak na- tions of the European Union, and against the continuation of the euro zone. To date, the policy responses of European leaders have not been sufficiently decisive, strong or credible to inspire counter- balancing fears that such speculators could lose their shirts. In principle, Europeans could wrong-foot speculators and defuse the euro zone crisis by creating a fiscal union and strengthening the European Central Bank. Giving the European Commission the power to issue large quantities of eurobonds based on the full faith and credit of the E.U., and empowering the European Central Bank to buy more national government debt and serve as a lender of last re- sort, could have a powerful impact. But instead, many Germans and Northern Europeans believe that without F OCUS The fragility of the euro zone was compounded by expansion beyond its original membership.