The liquidity crisis rages in Euroland, with Italy paying significantly more than 7% for two-year money. Brown Brothers Harriman’s Currency Strategy Team reported that:
Italy sold 183-day bills at a rate of 6.504%, the highest since August, 1997 and up from 3.535% at the last auction on October 26. Bid to cover was 1.47 vs. 1.57 last month. Italy 10-year yield now around 7.28%. Peripheral bond yields are all higher on the day.
This is emblematic of the liquidity problem Europe is facing.
But what about systemic solutions? I think Marc Chandler has it right in saying that fiscal union is the only real solution if the eurozone is to remain intact. Earlier in the month, I said I predict that when Europe moves to change its constitution to include greater fiscal integration, it will also include explicit mechanisms for countries to leave the euro area. And this is where the Germans are leading things with French president Sarkozy now onboard. But this is a vision of integration, oversight, penalties and exclusion.
This morality play version of fiscal union will not work in my view. But Angela Merkel specifically rejects Eurobonds as part of fiscal union as do the German people as well. Handelsblatt writes that polling shows that a majority of Germans rejects Eurobonds, with 57% coming out against. This is why Merkel is against Eurobonds. She knows they have no popular support.
On the other hand, former German Chancellor Schröder, who doesn’t have to play to popular opinion wants a full-on United States of Europe.
Die Welt writes:
He used [Eurobonds] in a speech on Friday that lasted only 20 minutes but caused a listener to gasp at the end, "that was intense". Schröder’s vision: "The ECB should announce that they would buy government bonds in unlimited amounts" , a key sentence reads. In the end, the European Central Bank is the only functioning institution in crisis Europe. "And I think there should be some Eurobonds."
Schroeder’s recipe for the recovery of Europe contains exactly that which the current federal government now spurns as a poison pill. But he goes much further. Schröder calls for no less than the United States of Europe. "There can be only one answer to the crisis: more integration.The goal must be a European Federation"- i.e. a European federal state. "Only a united Europe has a chance in global competition."
Neither the current governing coalition nor the German populace is anywhere close to getting where Schröder is. Note, despite American and British press stories to the contrary, behind the scenes eurobonds are being considered, according to Austrian daily Der Standard. But, with German public sentiment firmly against a “transfer union”, the official line will reject them for some time to come. The most Germany will deliver for now is what’s on the table: EU fiscal oversight with penalties and potentially expulsion for governments which deviate from the German low deficit vision for a United Europe.