Europe’s debt crisis: Fudge, the final frontier

The brief period of calm brought about by the European Central Bank (ECB) wading into the bond markets from early August to buy Italian and Spanish government debt is over. That intervention at first lowered Italian ten-year bond yields down from over 6% to around 5%. But yields have been creeping up since late August, and jumped above 5.5% on September 5th.

A more fundamental step towards a fiscal union may be needed. One way forward is to introduce Eurobonds, which would pledge “joint and several” liability. In theory that could mean that a small state is on the line for such debt; in practice it would mean Germany. Advocates of Eurobonds point out that the public finances of the euro area, taken as a whole, compare favorably with other big economies such as America and Britain, whose governments are currently able to borrow at record low yields. If the euro area were able to borrow as a whole, it too should benefit from low borrowing costs, helped by the liquidity advantage of creating what could become a vast government-bond market.

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