Mario Monti and the

6th August 2012

In an interview published Sunday with Germany's Spiegel magazine, Monti said that bickering within the 17- nation euro area was taking away from the critical policy responses needed to stem the debt crisis and preserve the future of the European Union.

"The tensions that have accompanied the euro zone in the past years are already showing signs of a psychological dissolution of Europe."

"I can only welcome the ECB's statement that there is a ‘severe malfunctioning' in the market for government bonds in the euro region. It's also true that some countries have to shoulder ‘extraordinarily high' costs to finance their debts. That's exactly what I've been saying for a long time."

Yields on Italy's 10-year bonds hit 6.28% last week and ended the week at 6.01%, comparing to 1.42% for 10-year German debt. Meanwhile Spain's 10-year bond yield rose to 7.44%, before ending the week at 6.77%.

Spanish and Italian borrowing costs rose last Thursday after Mario Draghi, the head of the European Central Bank said that Spain and Italy would have to formally request a resumption of the bank's bond buying.

Nevertheless, Germany benefits from the high rates of Spanish and Italian bonds because it keeps German rates at a lower level during the crisis, according to Monti. "The high yields Italy has to pay right now subsidize the low ones Germany is paying," he told Spiegel. "Without that risk, the yields on German government bonds would be somewhat higher."

Meanwhile, Ignazio Visco, the governor of the Bank of Italy, told Repubblica, a daily newspaper, that Italy does not yet need to turn to the eurozone's two bailout funds for financial assistance, but did not rule it out in the future.

"Looking ahead, it will depend on several factors," he said. "If the markets convince themselves a turning point has passed, if Italy does not abandon fiscal discipline and steps up its efforts to promote growth, then there will be no need for a rescue fund intervention. Much depends on ourselves."

So with the eurozone's troubles focused on southern Europe, how does the eurozone crisis look from Eastern Europe? "Not good, is the short answer," writes The Guardian's Andrea Capussela, highlighting that Hungarian laws and Romanian decrees have recently attracted the ire of Brussels.

Mr. Capussela argues that even though many commentators have ascribed this to the political effects of the recession (faced with popular distrust, rising populism and acute political strife, those governments sought to entrench themselves in ways which Brussels judged illiberal or undemocratic.) This interpretation neglects one important effect of the eurozone crisis: a change in the incentives under which these governments operate.

"While erecting those liberal institutions was then the key to a promised land, which their citizens wanted to enter, they have now become straitjackets that constrain these governments in responding to the political effects of the crisis, before a disoriented and increasingly Eurosceptic electorate. The real guardian of these institutions is thus the EU."

"But what sanctions can it credibly threaten to governments that see in their future either a dissolved EU or a diminished, second-class membership in it?"


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