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Euro quick fix may fade into years of unease

IT HAS happened time and again in recent months as Europe's debt crisis has played out. Stocks stage a strong comeback on expectations that a solution has been found. Then they quickly resume their decline as hopes dissipate, leaving investors puzzled and frazzled.

IT HAS happened time and again in recent months as Europe's debt crisis has played out. Stocks stage a strong comeback on expectations that a solution has been found. Then they quickly resume their decline as hopes dissipate, leaving investors puzzled and frazzled.

The problem, say watchers of both the subprime financial crisis in 2008 and the European government debt crisis today, is that many investors think there is a quick fix, if only officials can come to an agreement and act decisively.

In reality, one might not exist. A best case in Europe is a bailout of troubled governments and their banks that keeps the financial system from experiencing a major shock and sending economies worldwide into recession.

The latest rescue package for Europe gained approval from Germany on Thursday, after Chancellor Angela Merkel (pictured) won a vote in parliament, throwing the financial weight of the continent's biggest economy behind a new deal.

But a bailout does not mean wiping out the huge debts that have taken years to accumulate. Too much debt could take many years to ease.

This isn't to say that the discussions in Europe are moot. If governments cannot agree on how to rescue Greece from its debt, some fear the worst could happen a collapse of the financial system akin to 2008 that would ricochet around the world, dooming Europe but also the US and emerging countries to a prolonged downturn, or worse.

Just like the US, Europe built up trillions in debts during the past decades. What is different is that while in the US more of the borrowing was done by consumers and businesses, in Europe it was mainly governments that piled on the debt.

Now, just as the US economy is held back by households whose mortgages are still underwater, Europe cannot begin to grow again until its countries learn to live within their means.

On Thursday, the German parliament approved the ?440 billion ($A610 billion) bailout fund aimed at keeping the crisis from hurting large European countries.

The trouble is that even this fund, which requires the approval of all 17 nations in the euro zone, is already seen as inadequate for the scale of Europe's woes. Instead, a new idea is to bolster the fund by allowing an institution like the European Central Bank to use it as a guarantee for much greater lending, perhaps up to a couple of trillion euros.

This is the cause of the new optimism, but some worry that may not address one of Europe's most dangerous problems: fully recapitalising its banks.


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