Richard Milne asks in today’s FT (click here for the article): What will it take to stop the domino effect on its tracks before it reaches Spain and Italy?
He considers two ideas: One is a form of ECB “quantitative easing” under which the ECB massively accelerates its purchases of Spanish and Italian bonds in the secondary market. Another idea touted is to form some type of fiscal union. The problem with the first is that it would be politically difficult to implement (given Mr Axel Weber’s staunch opposition to quantitative easing) and unlikely to do the trick even if it were implemented. For as long as the twin mountain of sovereign debts and potential bank losses remains skyhigh, no amount of ECB purchases of chunks of it will settle the markets and break the gordian knot. Turning to the second idea, that of fiscal union, it is a bridge too far for Europe’s lilliputean leaders. Nevertheless, a de facto fiscal union can be implemented while avoiding endless debates on whether we ought to bring it about. How that can be achieved (given the political constraints currently in place) we tried to outline in our modest proposal. While open to all alternative suggestions of how the gordian knot of sovereign debt and bank losses can be cut, we still have not come across a plan or suggestion that is more promising.