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Europe’s Pain Meds Wearing Off

When Mario Draghi announced the ECB’s massive bond-buying program earlier this month, many began to wonder whether this might be the real deal. Would the bond-buying program finally calm the markets long enough for Europe to get its house in order, or would it meet the same fate as past rescue efforts and wear off after a few weeks?

Unfortunately for Europe, the answer seems to be the latter. After three weeks of relative calm in the financial markets, the latest shot of morphine is losing its kick. The Wall Street Journal reports that markets have responded to Spain’s recent austerity riots by increasing borrowing costs and fleeing the country’s stock market:

“Political turmoil in Spain’s richest region could generate the kind of market reaction that would precipitate a request for European support by Madrid,” said Deutsche Bank analyst Gilles Moec.

Spain’s borrowing costs rose Wednesday across the board as bond prices slumped. The yield on 10-year bonds rose 0.31 percentage point to 6.09% and yields on two-year notes, which had been particularly buoyed by the ECB’s pledge to buy bonds of up to three years’ maturity, climbed 0.28 point to 3.52%. Italian 10-year yields rose 0.11 percentage point to 5.22%. For both countries, the yields remained lower than before the ECB made its commitment to act.

Since the beginning of the financial crisis, Europe has been hobbled by a basic mismatch between its slow, fragmented decision making process and the rapid, sweeping changes that the crisis demands. So far, nothing has been fixed, and no one has stepped forward to make the big decisions.

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