The President of the ECB, Jean-Claude Trichet, has called for a “quasi-budget federation” in front of the Economic and Monetary Affairs Committee of the European Parliament. The “f” word, however, is ominously missing from the EP’s press release. Mr. Trichet went on to say that “pundits are tending to underestimate the determination of [EU] governments”.
The determination of EU to rescue the euro notwithstanding, things continue to look bad. The interest rate spread between Italian bonds and benchmark German Bunds have come to a euro-lifetime high. Belgian 10-year bonds spread to German bunds of similar maturity widened to the highest levels since at least 1993. In other words, markets are not buying the “determination” stunt, at least for now.
Hence Mr. Trichet’s comments. He is quite aware that in the long term the current institutional framework of the eurozone is NOT sustainable. Even if the ECB manages to calm the markets for the moment (which is by no means certain), new, more powerful crises may follow in the next decade, vastly undermining economic growth in the whole European Union.
So Mr. Trichet is doing two things. First, he is trying to calm the markets, which is a very sensible thing to do. Second, he is telling European politicians that the complacency on the eurozone institutional framework is no longer possible and discussions must start now. Now the question is are they listening?