Resident Fellow  Desmond Lachman

I was surprised at your editorial suggesting that the present credit crisis is not a macroeconomic crisis for Europe but rather a problem for national governments that have not addressed their own weaknesses ("Eurozone is strong but not immune", May 1). For it glosses over what is likely to be the most serious challenge to Europe's single exchange rate and single interest rate policy since the launch of the euro in 1999 as a result of the very divergent economic impact of the crisis on Europe's southern and northern member countries.

That we are dealing with a European macroeconomic crisis might best be illustrated by contrasting how the US has dealt with the bursting of its housing market bubble with the limitations on Spain in dealing with the bursting of its even larger housing market bubble. Over the past six months, to cushion the fallout from its housing bust, in addition to a fiscal stimulus package, the US has cut interest rates by 300 basis points and allowed its currency to depreciate to the lowest level since floating began in 1973.

Sadly, Spain sorely lacks either an interest rate or an exchange instrument to deal with its present economic problems, which--given the very size of the Spanish real estate sector--could be argued to be on a scale with that of the US. Instead, Spain has to live with an appreciated euro and with a level of interest rates more appropriate for Germany than for Spain, even at a time when its economy is slowing and its current account deficit has ballooned to 9 per cent of gross domestic product.

One might similarly make the point that Italy faces a macroeconomic crisis in having to try to address its chronic public finance weaknesses at a time of a significant economic slowdown without the benefit of an independent interest rate and exchange rate policy to offset the negative economic impact of its much needed fiscal retrenchment.

In today's very interconnected world, one would have thought that a macroeconomic crisis in either Spain or Italy would be a macroeconomic crisis for the euro area as a whole.

Desmond Lachman is a resident fellow at AEI.