The positive sentiment lasted barely a few hours though. The same problems that we’ve been tracking since January 2010 haven’t gone away, and are sending markets down the sell path again. Spain appears to be heading for a sovereign bailout, its 10-year bond yield has remained above the dreaded 7 percent level, and it’s only a matter of (short) time until the European Central Bank (ECB) starts buying Spanish sovereign debt, or lends more to Spanish banks to do this instead, or we have some more formal bailout mechanism. Then Italy moves back into view, and as we all know the pot isn’t big enough to underwrite Italian sovereign debt, unless we have a serious change of heart from the German government.
Given the track record to date, it is probably too much to expect EU leaders to announce a plan for genuine fiscal integration at their summit next week, but that is the only thing that will make the euro viable over the long term in its current form. Banking union, eurobonds, a common regulator, these are ultimately just toppings; the main ingredient needed for monetary union to work is fiscal union. That’s not to say that the aforementioned items are not necessarily desirable, just that they don’t address the main issue, noted by Professor Milton Friedman at a lecture at the Bank of Canada in 2000 and worth repeating today:Page 2 of 4 | Prev Page | Next Page