But it is likely to calm financial markets and buy time for European policymakers to work with other weak economies threatening the stability of the 17 countries that use the euro.
Europe still has plenty of troubles to address in the three other countries that have already received financial help — Greece, Portugal and Ireland. In Greece, voters could elect a government next week that will refuse to live up to the terms of the country’s $170 billion rescue package. Portugal is combating a toxic combination of high debt and 15 percent unemployment. Ireland is cleaning up a banking mess a lot like Spain’s. Then there’s Italy, the eurozone’s third-largest economy, where government debt is piling up as the economy stagnates.
“We still have some pretty fundamental problems to solve,” says Nicolas Veron, senior fellow at the Bruegel think tank in Brusssels. “We need more radical solutions than this one.”
Spain on Saturday asked finance ministers for the 17 countries that use the euro for money to rescue its banks, which have been crushed under the weight of bad real estate loans. The finance ministers responded by offering up to $125 billion in loans that the Spanish government could funnel to banks.
The plan eases an immediate crisis in the euro’s fourth-largest economy. The deterioration of Spain’s banks and the pressing need for a rescue was threatening to bankrupt its government. That would likely cause far more pain for Europe than the financial messes in Greece, Portugal and Ireland.
“This move brings into sharp relief the enormous amount of money that will be needed to cordon off the rest of the euro zone periphery in the event of a Greek meltdown,” says Eswar Prasad, professor of trade policy at Cornell University.
Investors are worried about what will happen when Greek voters go to the polls June 17.
If Greece reneges on the strict austerity measures that come with its rescue package, it could be forced to abandon the euro. Greece’s departure from the Eurozone would likely cause financial chaos across Europe: Greek debts would go from being denominated in sturdy euros to being denominated in Greek drachmas of dubious value.