5th December 2011
The price for a massive European Central Bank intervention aimed in particular at buying the bonds of Italy and Spain appears to be huge budget concessions demanded by Germany. This would see the European Union given a big role to play in imposing budget controls on other eurozone member states. But there is a long way to go trying to satisfy both markets and electorates.
The situation is still fraught with huge political risks in terms of getting the agreement of Germany and the German voter to such an intervention while other states may quail at handing over so much budgetary power to the EU centrally.
Stewart also gives an interesting interpretation of the signals being sent by the ECB boss Mario Draghi.
She writes: "By the end of this week, the outline of a plan appeared to be emerging. ECB boss Mario Draghi dropped a hint to the European parliament that if a new, more binding "fiscal compact" could be struck, "other measures" could come into play.
"Euro-watchers heard his remarks as a promise of massive intervention by the Frankfurt-based central bank – so long as the eurozone's governments promise to subject their future tax and spending plans to strict oversight from Brussels, with penalties for transgression."
FT Alphaville is also analysing Draghi's position. It writes: "A charitable interpretation of Draghi's speech is that the ECB is waiting for a firm commitment to further fiscal union before targeting government bond yields and/or introducing QE. A less charitable interpretation is that it's yet more prevaricating and neither the ECB nor the main eurozone countries want to make the first move. Frankly, it's a perverse game of chicken whichever way you look at it."
However there are other hurdles to be overcome internationally as the BBC's Economics Editor Stephanie Flanders reports here. The IMF will not help underwrite the plans by allowing special drawing rights. Interestingly while France and China were in support, the US and Germany were not. Flanders suggests that Germany appears to be as much against printing money though the IMF and it is with the ECB.
She then quotes a US official saying:"We're talking about Europe – this is about the future of Europe. And the Europeans recognise more than anyone else that their future is in their hands." He said that Europe had the resources and tools to do this, and the tools being talked about at a global level were simply reinforcement: "They are complements, not substitutes."
Back to Europe, and this weekend's Sunday Times is suggesting that the ECB could be planning a fund worth as much as a trillion euros to back periphery countries of course with conditions attached.
But if the EU doens't get one with reform, there was a warning from the world's largest independent bond fund manager Pimco this weekend, which is demanding that Europe either bring in more fiscal integration or considers a managed break up according to the Telegraph.
The paper quotes Andrew Balls, who runs Pimco's European investments – and is Shadow Chancellor Ed Balls' brother, saying: "They can't continue to muddle through. They'll either have to signal their position or you'll get a continued disengagement by investors from the eurozone. Yes, yields are higher but you have existential problems and risk that's hard to quantify. We're very cautious and we're underweight versus our indices."
FT Alphaville has also been considering the debate over tactics. Is it fiscal union first or QE first? RBS strategists believe it would be wrong to bring in ECB quantitive easing first but Credit Suisse early last week suggested the EU could not hope to bring in fiscal changes in time. It said: "conditions will increasingly justify the ECB embarking on QE early next year."
However some local issues are being addressed. Bloomberg reports on a 24 billion euro austerity programme due to be passed by Mario Monti's cabinet in Italy.
The Telegraph reports that Italian welfare minister Elsa Fornero was in tears during the announcement because of the scale of the cuts.
Meanwhile the Irish Prime Minister Enda Kenny has warned that Ireland faces even more austerity with the BBC suggesting this morning that VAT may rise to 23 per cent.
EU leaders meet on Friday this week. Meanwhile the crisis continues.
More from Mindful Money:
To receive our free email newsletter sign up here.