Stocks have fallen 2% in early trading, but recovered off session lows and are basically even with the lower opening. The Standard and Poor’s political gambit is certainly part of the story, but the crisis in Europe has driven stock prices over the past week or so. A discussion between the world’s leading finance ministers focused more on Europe than S&P. The debt crisis there led to a Sunday night bailout (Sunday is the new Monday again, as Calculated Risk tells us) from the European Central Bank, which intervened to purchase Italian and Spanish debt to lower their yields.

Borrowing costs for Spain and Italy tumbled on Monday as the European Central Bank intervened to buy the countries’ respective bonds and try to stabilise financial markets.

Dealers reported that the ECB had started buying the debt as soon as European bond markets opened. A senior Italian official said his impression was that the ECB was buying.

Yields on 10-year Italian bonds, which move inversely to prices, fell 60 basis points to 5.49 per cent, taking them well below the 6 per cent level above which they had been trading for much of last week.

Spanish borrowing costs also dropped, the 10-year bond yield falling 79 basis points to 5.25 per cent. The euro rose against the dollar.

Bond yields are pretty much the direct near-term crisis in the larger European states, particularly Italy, which doesn’t particularly have a deficit issue. This is a panic-based crisis, based on the belief that debt problems will spread out from Greece and Portugal and Ireland to Italy and Spain. So decisive action by the ECB is desired and probably a little late.

The question is whether or not it will work. Markets lost their gains in Italy and Spain even as the bond yields fell. The truth is that we have a global unemployment problem, which goes hand in hand with a depressed economy. Governments seem far more spooked by bond markets and debts and deficits than this fundamental point. The fact that increased employment would bring in more tax revenue and reduce deficits doesn’t seem to shake this dynamic.

If anything, at least the ECB is attempting to use their power to improve the economies of their members, if only by driving down their bond yields. Fiscal policy or monetary policy aimed at full employment have not followed. And so we muddle on.