The European Central Bank’s interventions in the bond markets to arrest the soaring yields from Spanish and Italian debt appears to have worked, for now. The ECB was extremely aggressive in buying debt, enough to drop the yields at least a full point. But the fact that core Europe was so threatened shows the risks to the Eurozone economies because of not only the sovereign debt crisis, but because of slow growth, in part thanks to all these austerity programs being instituted by member countries. The latest figures are bad all around:

Economic growth in the euro area fell more than expected in the three months through June, according to official figures released Tuesday, as growth in Germany came almost to a standstill.

Gross domestic product in the 17-nation euro area rose 0.2 percent in the second quarter of 2011 compared with the previous quarter, according to Eurostat, the E.U. statistics agency. Euro area growth was down from 0.8 percent in the first quarter.

G.D.P. growth in Germany, which has been the region’s economic locomotive, fell to 0.1 percent compared with the previous quarter, when the economy expanded 1.3 percent, the German Federal Statistical Office said. Analysts had expected growth of 0.5 percent.

“It now looks like growth is slowing in core countries too,” Christoph Weil, an economist at Commerzbank, wrote in a note. “This could intensify the sovereign debt crisis in so far as the readiness and ability of countries with high credit ratings to help crisis-stricken countries will drop as a result. This could trigger a downward spiral in economic growth.”

Yes, you can forget about the world where the decision of whether or not to establish a joint eurobond is the biggest in Europe. Now you’re talking about near-zero growth, even out of Germany, the economic dynamo of the coalition. Italian growth outperformed Germany in the quarter. And the French economy didn’t grow at all.

I should add that jobs still increased in Germany, in particular thanks to work-sharing, where the government supports smaller hours so firms need to hire more people to cover the work. It’s a policy we should embrace.

A European sovereign debt crisis obviously would have a major impact on interconnected US banks. But a growth slowdown lowers global demand and makes it harder to sell US exports. So in a networked world, we’re screwed either way by poor economic performance in Europe.

What we need is what IMF head Christine Lagarde, in a surprising op-ed for the Financial Times, counseled today: a continued aggressive program of fiscal stimulus:

After the crisis unfolded in late 2008, global policymakers came together to act with common purpose. Their efforts saved us from a second Great Depression, by supporting growth, attacking sclerosis of the financial arteries, rejecting protectionism and providing resources to the International Monetary Fund. It is time to rekindle that, not only to avoid the risk of a double-dip recession, but also to put the world on the path of solid, sustained and balanced growth […]

What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs. That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs.

By the same token, support for growth in the near term is vital to the credibility of any agreement on consolidation. After all, who will believe that commitments to cuts are going to survive a lengthy stagnation with prolonged high unemployment and social dissatisfaction?

Lagarde runs the IMF, so obviously there’s some emphasis on fiscal “consolidation,” a nice word for austerity. But she seems much more concerned with growth, and that means at the moment the kind of spending from the government sector that can increase demand. She also says that revenues must increase, particularly “measures that have the lowest effect on demand.”

We know what to do. We just have elites that refuse to do it.

UPDATE: And Germany’s Angela Merkel and France’s Nicolas Sarkozy proposed…. a balanced budget Constitutional obligation for every Eurozone partner. Seems like the perfect antidote for austerity.