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Europe Still Has Problems

The massive bailout fund the EU promised early this morning should be enough to keep struggling euro-zone nations afloat for the next few years.

But it doesn't solve longer-term problems. Greece, Spain and Portugal, among others, face the difficult combination of rising debt and little or no growth. Bailouts would take the form of loans, and would only add to countries' debt.

"This doesn't solve any of the basic fiscal problems, so ultimately it raises the stakes and creates a chance of even greater financial failure," the economist Tyler Cowen wrote today.

The bailout includes not only the promise of loans, but also action by the European Central Bank to buy government bonds, which should make it cheaper for governments to borrow money.

The idea is to buy time for troubled euro-zone nations to both cut spending and get their economies going again. It's very tough for any country to do both at once; it's particularly tough in the euro-zone, because individual countries can't devalue their currency, which both reduces the value of existing debts and makes exports more competitive.

Still, the picture in a few years could be much brighter for the EU, the economists Simon Johnson and Peter Boone write: lower deficits, Spain out trouble, and Portugal and Ireland "scraping by in limbo but now isolated problems." (Even in a rosy scenario, they figure that Greece won't be able to keep up with its debt payments.)

On the other hand, they write, countries may simply tap bailout money without addressing their underlying problems, allowing the debt issue to "fester."

More broadly, having multiple sovereign governments share a single currency is likely to be a continuing source of tension. "They're not all partners together anymore," Reuters's Felix Salmon wrote today. They're "bifurcating into the rich lenders, on the one hand, and the formerly-profligate debtors, on the other."

Ultimately, the FT's Wolfgang Munchau argues, the bailout will have to be followed by broader economic reforms, reduced imbalances within the euro-zone and tighter rules about individual countries' taxing and spending — "all the things over which the EU has been, and still is, in denial," he writes.