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George Soros made headlines Sunday when he said the European Union is "like a bubble" and predicted EU "authorities have a three-month window during which they could still correct their mistakes and reverse the current trends."
Three months does not seem like a long time but Soros is "being generous," says Columbia Professor and Nobel laureate Joseph Stiglitz. "They don't get how acute the crisis is," he says of EU policymakers. "They don't understand the dynamics of market forces."
Take the European Central Bank, for example. On Wednesday, the ECB declared it was "ready to act" but took no actual action to address the crisis, which has clearly infected Spain. The day before the ECB stood pat, Spain's Treasury Minister Cristobal Montoro essentially said his country was at risk of being shut out of the capital markets.
On Wednesday, concerns about such issues took a backseat and stocks surged amid rumblings about Germany being more open to a European banking union, which Stiglitz says is the "only solution" to address the crisis.
"You cannot rely on the Spanish government to bail out the Spanish banks," he says. "It has to be a European banking system with European finance backing up all the European banks. They're not there yet."
In the absence of a European banking union, Stiglitz says there's no rational reason for Spaniards to leave money in Spanish banks when they can move them to stronger German banks. That creates a "vicious cycle," he says. "Europe needs a European financial system. If they don't do that, the system falls apart fairly quickly."
The good news is EU leaders seem to be coming around to this idea, however grudgingly in the case of Germany's Angela Merkel. In addition, Spain had a successful bond offering Thursday morning.
European markets were modestly higher in reaction and U.S. futures pointed higher after Wednesday's big rally. But this reprieve may prove short-lived if EU leaders don't make serious progress at their summit later this month.
Europe has been doing "just enough to keep things going" so far, Stiglitz says. "The question is: are they at the point where there's no extra dose of medicine that can keep it going? I think they're almost there."
Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com
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