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Sound crazy? It's not. What makes contagion so scary is that investors respond in a completely rational fashion: they panic. During the Asian crisis, the thinking went like this: "I just lost a bundle on that Thailand thing, so I'm darn sure not going to get burned in South Korea. Better be safe than sorry and get out now." No one wants to be the sucker stuck with the losses more-panicky investors avoided. Once contagion sets in, investors perceive risk in ways that can make their fears become reality.
The way the euro zone has dealt with Greece's tragedy has shown a perplexing lack of understanding of this phenomenon. Instead of firmly backing Greece from the start, E.U. leaders like German Chancellor Angela Merkel waffled, hoping a few empty promises and anxious ministerial powwows would be sufficient to support investor confidence. They put domestic politics ahead of the stability of the euro zone and the entire global economy by letting the genie out of the bottle.
Now, with the Greek rescue, Europe has finally shown the backbone to take on contagion. But it needs to do more. This is no longer a Greek crisis; it's a euro-zone crisis. The advantage Europe has today over Asia in 1997 is that it is more integrated. The Europeans ought to act collectively to stabilize and then reduce the debt loads of all the weaker euro-zone states. Or the Greek flu might spread beyond Europe.