Floyd Norris believes that the European Central Bank shoveling cheap money to banks in the region has stopped the bleeding in Europe for a period of years:

In recent weeks, the new president (of the ECB, Mario Draghi) publicly insisted the central bank would never do any of the things that Germany opposed. The bank would not drastically step up its purchases of Spanish and Italian government bonds. It would not directly finance European governments. It would not backstop European rescue funds or print money that the International Monetary Fund could use to bail out governments.

It would do only what central banks normally do. It would lend to banks.

It turns out that may be enough to stem the European crisis for at least a few years, and go a long way to recapitalizing banks in the process […]

There is no limit on what the banks can do with the money. But there is an obvious, virtually risk-free, option. A bank can buy short-term securities of its own government and pocket the difference — up to four or five percentage points — for the life of the securities […]

It now seems obvious that this was what Mr. Draghi had in mind. Spain and Italy will be able to borrow money from the market at rates they can live with, but this move is unlikely to have much effect on long-term rates. If those stay high, the pressure for austerity, as Germany demands, will remain.

So this is a pretty insidious move from Draghi. Lending at a low rate to banks allows them to use the carry trade to earn their way out of insolvency. This recapitalizes the banks to some extent. And it prevents a liquidity crisis for both banks and sovereigns. But because the long-term interest rates for borrowing stay mostly the same, peripheral countries like Italy and Spain still have to starve their populations with austerity, which Germany and the ECB want.

There is one problem with this. It’s a recipe for recession in Europe, or even depression. Countries will still be able to borrow but the austerity will stunt their growth. Over the long-term, this doesn’t even help Germany, since they export to these countries. As Paul Krugman says, there’s still a fiscal adjustment problem that needs to be managed across the countries of the Eurozone, and it’s hard to see how that happens.