Required cuts in government spending set loose a downward spiral of falling GDP and tax revenue, rising interest rates on government debt, and more cuts -- now Madrid tumbles toward insolvency.
Italy and Greece have wages too high and labor laws too cumbersome, making much of their economies uncompetitive. Large trade deficits with Germany, and borrowing to finance those, ultimately caused capital markets to lose confidence.
Labor market reforms are not enough -- wages must fall dramatically, perhaps as much as 30% to 50%. Such internal devaluation is not possible when workers have mortgages and other debts denominated in euro.
Even if the Mediterranean states had their own currencies, those would surely be falling now against other currencies. Workers would be able to buy fewer foreign products, but they would better able to make goods for export and make loan payments in pesetas, lira and drachma.
The ECB could wink and lend billions to Spanish banks against bad real estate loans, and buy government debt that will never be repaid, but collectively Mediterranean governments need to shed some 2 trillion euros in debt to become solvent. The ECB can't purchase and forgo interest payments on that much bad paper without completely destroying the confidence of international investors in European financial institutions.
Central bank policy can help dampen inflation when an economy overheats and lift borrowing, investment and home sales a bit when it falters, but it can't save economies when national governments pursue flawed economic policies to serve political objectives.
Both the Fed and ECB policymaking committees meet this week, but they can do little to avert a recession.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.