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Merkel: No, no and ... no (to European Debt Agency)

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The Iron Lady of Europe's most powerful economy is opposing calls for two measures that other policy makers believe could help ease the continent's debt crisis. Finance ministers from the 16 euro zone nations were meeting in Brussels today and were expected to discuss calls for boosting the EU's bailout fund and at the same time creating a new bond, dubbed the E-bond, that would be joint European government debt. The latter proposal came from Jean-Claude Juncker, who chairs the euro zone finance ministers group, and Italy's Finance Minister Giulio Tremonti, who outlined their idea in an article they wrote in The Financial Times today. "In spite of recent decisions by European fiscal and monetary authorities, sovereign debt markets continue to experience considerable stress," the two officials said. "Europe must formulate a strong and systemic response to the crisis, to send a clear message to global markets and European citizens of our political commitment to economic and monetary union, and the irreversibility of the euro. "This can be achieved by launching E-bonds, or European sovereign bonds, issued by a European Debt Agency ... Time is of the essence. The European Council could move as early as this month to create such an agency, with a mandate gradually to reach an amount of outstanding paper equivalent to 40 per cent of the gross domestic product of the European Union and of each member state."

Such a move, they said, would allow sufficient size for the market to become Europe's most important, "progressively reaching a liquidity comparable to that of U.S. Treasuries." German Chancellor Angela Merkel wasted little time in saying no - to both ideas, actually - suggesting an E-bond would be on shaky ground legally. The Dutch Finance Minister backed Ms. Merkel on the issue of increasing the size of the rescue fund, reports said, while Poland's Prime inister was at her side when she rejected such a move at a news conference.

Voters in Germany have become increasingly wary over bailouts, first to Greece and Ireland, and now amid speculation Portugal and Spain could be next in line. An E-bond, meanwhile, could drive up government borrowing costs in Germany, which are low compared to its neighbours and are the European benchmark. Greek Prime Minister George Papandreou welcomed a serious discussion on the idea of the bonds. But, of course, he would, given the steep borrowing costs his government has faced. What's clear is that divisions among Europe's leaders continue to haunt investors, at the same time ramping up the pressure on the European Central Bank to try to do the heavy lifting with a one-size-fits-all monetary policy. "Today’s European finance ministers meeting has seen the usual disagreements about how best to deal with the problems in Europe and with Ireland set to vote on its austerity plan tomorrow, event risk remains the main obstacle to further euro gains," said CMC Markets analyst Michael Hewson. "The IMF has suggested that the current bailout fund should be increased in size, something Germany is opposed to, but which Belgium, among others, is in favour of," he said in a research note. "This lack of consensus continues to undermine investor sentiment towards the single currency and will continue to weigh on euro sentiment in spite of concerns about further [quantitative easing] measures from the Federal Reserve."

In May this year, Asymptotix was arguing that a EU Debt Office was missing. Comparing the structure of any nation, that is what is missing. But the EU is not one nation, it's a super layer. The European Union has to decide to go the full monty or stop the euro experiment! The days of half measures are gone. The euro has been challenged and we cannot let the market keep on challenging these temporary measures such as the EFSF or ECB's limited powers. The problem is that Treaty changes are probably necessary and politicians such as Angela Merkel needs to have one last final look at what a euroZONE means, before it's over.

Further reading: QFINANCE and Asymptotix published earlier this Autum a White Paper about a European Stabilisation Bank.

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