Leading article: Europe's leaders have got their prescriptions wrong

The fact is that investors are now behaving out of fear rather than greed

The Portuguese panic subsided a little yesterday. Lisbon managed to offload 1.25 billion euros (£1bn) worth of 5-and 10-year bonds. But few expect this to be a permanent reprieve. The European Central Bank is believed to have helped to ease the pressure on Lisbon by snapping up a tranche of the bonds. Moreover, Portugal still had to pay a painfully high interest rate of 6.7 per cent. When investors began charging Greece and Ireland those sorts of rates, it was not long before an external bailout became necessary.

What is alarming investors is a fundamental macroeconomic imbalance. The latest economic statistics from Germany confirm the existence of a two-speed eurozone. The German heartland is growing impressively. It expanded by 3.6 per cent last year, the fastest pace since reunification in 1990. And growth of 2.5 per cent is forecast for 2011. Yet the eurozone periphery is stagnant.

Greece, Ireland, Spain, Portugal and Italy have large stocks of public and private debt and it is hard to see how they can bring those down to manageable levels without robust growth. The case of Portugal emphasises the importance of weak growth prospects in driving this crisis. The Portuguese state over borrowed before the global downturn began, but not to Greek levels. And unlike Spain and Ireland, Portugal did not experience a disastrous property bubble. Portugal's crisis is purely down to the fact that it seems unable to grow quickly enough in the present economic environment to meet its debt obligations.

The prescription of European policymakers for struggling eurozone nations is budget cuts and internal devaluation to regain competitiveness in the hope that the markets will give them a break. It is true that these leaders established a European Stability Fund backstop last year, which has been tapped by Ireland and Greece. But this fund is widely understood to be too small to cope if Spain or Italy needed help refinancing their debts. And European leaders are hopelessly divided over other suggested solutions, such as issuing new bonds collectively backed by all eurozone nations.

The immediate problem is that budget cuts are undermining economic recovery. The Bank of Portugal this week forecast that Portuguese GDP will fall in 2011 because of Lisbon's spending cuts. And internal devaluation is increasing the size of these nations' debts in real terms, making them more onerous to service. The Portuguese unions are beginning to resist Lisbon's austerity programme, too.

What Portugal needs is a combination of debt restructuring and a burgeoning market for its exports. But it is unlikely to get either. The mere mention of restructuring is anathema in European capitals. And the co-ordinated eurozone fiscal correction is creating weak export markets on the Continent.

The Portuguese Prime Minister, Jose Socrates, took a swipe at market "speculators" this week. And Mr Socrates is right to complain there has been greed from credit markets in recent years. German, French and British banks, in particular, funnelled ridiculous amounts of money to eurozone periphery banks, firms and states in the boom years. This made quick profits, but risk was grossly underestimated.

Yet the fact is that those investors are now behaving out of fear rather than greed. They fear a default, at some stage, by Eurozone periphery members. That is why they will only lend more money to those nations at a usurious rate of interest. And European Union leaders, in their dogmatic refusal to address the problem of growth or unsustainable debt, continue to give them very good reason to be afraid.