As Pete has noted, George Osborne has been making headlines while braving rollercoasters in California. The
chancellor’s view that the Eurozone must accept
‘the remorseless logic of monetary union that leads from a single currency to greater fiscal integration’ marks the moment when the British government began to campaign for a two-tier
Europe, which would allow Britain to sit on the periphery of the union. No doubt a wry smile will have danced across Bill Cash’s lips, because this arrangement was first envisaged by the
Maastricht rebels all those years ago.
The Eurozone, however, appears intent to remain on its current course of half measures. Francois Baroin, France’s new finance minister, rejects Osborne’s belief that
Eurobonds must be created to quell disquiet on the markets. In a statement made earlier today,
Baroin said that the EFSF, the Euro’s emergency bailout fund, would be expanded if necessary to resist contagion. This merely restates the terms of the deal that was done on Greek
debt last month and reflects the fashion for accord between France and Germany. Angela Merkel
is understood to oppose Eurobonds vehemently because they would weaken the German economy and further impair her chances of re-election.
But, as I wrote last week, the markets openly doubt that the EFSF can stop
contagion. Indeed, there are signs that Brussels agrees with the markets: the indication that the ECB will restart its bond buying programme in Italy and Spain was a response to those concerns and
the ensuing speculation.
As France and Germany seem determined to resist costly integration at this stage, it seems likely that the ECB will have to continue risking its credibility by purchasing bonds from endangered countries. The price of this is that it deflates buoyant German bonds, which explains why the Bundesbank is apparently sceptical about the strategy. Perhaps Merkel sees this as the lesser of two evils; the feverish markets, though, do not.
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