The failure of the Spanish bank bail out to improve market sentiment this week is disappointing. The markets have chosen to focus on the fact that the bail-out will add to Spain’s government debt, which is increasingly being viewed as unsustainably high. The spike in 10 year Spanish bond yields to over 7 per cent yesterday has demonstrated that new forms of “burden sharing” for government debt are needed at the summit on 28/29 June.
Chancellor Merkel once again appeared to dash these hopes on Thursday by ruling out the issuance of eurobonds, and a eurozone bank deposit guarantee scheme. She is willing to contemplate these reforms only after further constitutional moves in the direction of fiscal union, which might take years to achieve. However, there are two reasons for thinking that the German position might turn out to be be more flexible than it seems.