With the housing collapse lowering spending, the Fed, in an effort to ward off recession and help banks with fragile balance sheets, has been cutting interest rates since the fall of 2007.

A cut in policy rates or quantitative easing by another name will do nothing to enhance the troubled southern European economies competitiveness.

One reason that interest rate spreads in financial markets remain high is that distressed eurozone countries growth prospects look so weak.

Conversely, when the monetary authority tightens credit too quickly, asset prices become more volatile, resulting in more non performing loans and triggering economic shocks.

Finally, earlier this month, they decided to devote 100 billion to help Spain clean up its ailing banks. The market s reaction was to send Spanish government bond rates even higher.

Prices of bank shares and the Euribor OIS spread (a measure of financial stress) signal a profound lack of confidence in the sovereign debt of distressed countries, with yields on ten year Greek bonds recently hitting 25 .

The European Union has finally committed itself to helping its financially distressed members.

It loaned on little collateral to shaky banks.

In the rest of struggling Europe, price adjustment is barely noticeable.

It could also be relevant to purchases of debt from distressed member states.

Our lending can provide breathing space for countries in difficulty.

Now, reported NPLs amount to little more than 1 of assets.

For example, in financially distressed Spain, unemployment now exceeds 20 .

Investors in Europe s troubled economies are already getting enough as it is.

The ECB will object, not without reason, that monetary policy is a blunt instrument with which to rebalance the European economy. A cut in policy rates or quantitative easing by another name will do nothing to enhance the troubled southern European economies competitiveness.

So you would think the same would be true for US households and embattled European governments.

And parts of the country are more similar to sections of troubled developing countries than to China s showplace cities.

Yet, with high levels of unemployment likely to keep nominal wage growth relatively subdued, typical troubled households could be worse off with higher food and fuel prices cutting into disposable income.

Europe and Japan are both facing difficult challenges, including rapidly aging populations and sputtering economies.

These are the right principles. They could be applied more effectively by capitalizing the institutions that are burdened by distressed securities directly rather than by relieving them of the distressed securities.

But, like the struggling countries of southern Europe, France has few options.

MUNICH In blatant violation of the Maastricht Treaty, the European Commission has come forward with one bailout plan after another for Europe s distressed economies.

Nonetheless, the German model does hold some useful lessons for the eurozone s embattled peripheral countries today.

Do Low Interest Rates Ensure High Asset Prices?

Furthermore, the point was not to help private banks get rid of their troubled assets.

Even for distressed households that have borrowed long term, the effects of higher inflation are uncertain.

Gold prices are extremely sensitive to global interest rate movements.

Breaking the negative feedback loop between distressed sovereigns and distressed banks whereby bank rescues exhaust fiscal resources and make it likely that the next financial institution in trouble will not be able to count on government support requires ensuring that it will not recur even in extreme circumstances.

Will Rising Interest Rates Torpedo Stock and House Prices?

Just ask any of the large international banking groups headquartered in financially stressed eurozone countries.

It needs either the ECB or an expanded European Stability Mechanism to purchase distressed governments bonds today.

Nothing less will persuade investors to go near debt issues from the eurozone s fiscally challenged members.

Instead, Europe will have to rely on wage flexibility to enhance the competitiveness of its depressed regions.

And, with a single supervisor in place, the ESM will be permitted to inject capital directly into troubled banks.

Unlike some months ago, now the European Central Bank can intervene and buy troubled countries debt.

This means that real interest rates interest rates measured in terms of goods and services have stayed the same.

Food prices are the same in the two countries, while in the second country, the price of cloth is five times higher than the price of food.

Interest Rates

When interest rates rise, the prices of those assets will fall as well.

Not surprisingly, workers are leaving the eurozone s crisis countries, but not necessarily for its stronger northern region.

Worse, some of the troubled countries inflation rates are still running higher than those of their trading partners.

Finally, earlier this month, they decided to devote 100 billion to help Spain clean up its ailing banks.

In such a scenario, non performing loans in China s banking system would probably amount to roughly 1 trillion.

In many of the troubled emerging economies, however, monetary policy has shouldered the burden of controlling inflation, managing the local currency s value, and supporting growth.

The challenge now is for the presidency and the Commission to give fresh political impetus to the EU s stalled reform drive.