ECB calls for integration as bond yields jump

Associated Press
European Central Bank head Jean-Claude Trichet, right, listens to Mario Draghi, next to take the helm of the European Central Bank, during a conference on the debt crisis, Monday Sept. 5, 2011, in Paris.  Trichet says Europe's debt crisis has revealed the weaknesses of the eurozone but that it has created a will to keep spending in check. (AP Photo/Michel Euler)
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European Central Bank head Jean-Claude Trichet, right, listens to Mario Draghi, next to take the helm …

PARIS (AP) — The eurozone needs a "quantum" leap toward economic integration, the incoming chief of the European Central Bank said Monday, as the bond yields of countries with shaky finances, like Greece and Italy, jumped amid increased investor tensions.

Mario Draghi warned that measures like the bank's buying of bonds to stabilize markets were only temporary fixes and that only substantially more integration would address the fundamental problem of a lack of coordination of the eurozone's fiscal policies.

The movement in bond yields on Monday showed just how varied investors' confidence was in different eurozone countries. Borrowing rates jumped in countries considered high-risk, such as Greece, Italy and Spain and fell in Germany, widely considered a safe haven in times of financial turmoil.

Speaking at a conference in Paris, Draghi dismissed the idea of eurobonds — debt issued jointly by the eurozone countries. Some have argued this would help weaker countries borrow more easily because they wouldn't have to pay such high interest rates, which in turn make their debts bigger. But stable countries like Germany would likely see their rates rise.

Instead, Draghi suggested the eurozone should adopt rules that would require more budget discipline. There is already a proposal that would require all eurozone countries to balance their budgets. Profligate spending during boom times funded by cheap debt is one of the root causes of the current crisis.

Market tensions were high on Monday, both due to worries about some countries' debt problems and a global financial sell-off triggered by concerns that the U.S. economy may slip back into recession.

The difference in interest rates between the Greek and benchmark German 10-year bonds, known as the spread, spiraled to new records on Monday, topping 17.3 percentage points. Yields on the Greek bonds were above 18 percent.

High yields mean borrowing is more expensive for Greece, making it even harder to reduce its debt load.

In fact, its yields are so high that Greece has been relying since last year on funds from a euro110 billion ($157 billion) package of bailout loans from other European Union countries and the International Monetary Fund. On July 21, European leaders agreed on a second bailout, worth an additional euro109 billion.

Italy's own 10-year bond yields jumped to 5.45 percent amid signs that the government in Rome is wavering in its commitment to enforce its austerity program.

ECB chief Jean-Claude Trichet in recent days has called on Silvio Berlusconi's government to push through with the deficit-cutting measures promised in August.

Italy's stability is of particular concern because it would be too expensive to rescue for the eurozone. In an effort to steady the yields, the ECB has been buying Italian and Spanish bonds in recent weeks, driving down the interest rates.

On Monday, the bank announced that it had increased its purchases last week to euro13.3 billion ($18.8 billion). That's double the euro6.65 billion spent the previous week.

Draghi indicated that such makeshift measures would continue, including making sure the European Financial Stability Facility — the eurozone's bailout fund — takes over the bond purchases and has enough cash in it.

But, not forever.

"The Programme (of bond-buying) is temporary and fully sterilized," he said in the version of his speech published on the Bank of Italy's website. "In other words, it should not be taken for granted by member states."

The eurozone needs to quickly solve the root of their problems, he said.

"The crisis starts from the incompleteness of the European construction," he said, and important reforms need to be made to solve it. "Overall, the aim of this effort should be a quantum step up in European economic integration."

Draghi's remarks echoed those made by the current ECB chief, who spoke at the same conference.

Trichet said that one solution for the debt crisis would be to eventually create a "federation" with a central finance ministry for the continent that would have the power to force countries to make the difficult decisions that European leaders can only now pressure them to make.

He did not mention Italy, but he and other European officials have recently had to urge Rome to make budget cuts or risk destabilizing the entire eurozone.

"We can imagine a federal government with a federal finance minister," he said, who would "be capable of imposing this or that decision on any country that is not acting in the interest of the greater good of the federation."

In the heyday of the boom, several European countries spent more than the EU rules allowed. After the global financial crisis further hurt their finances, countries like Greece and Portugal came close to bankruptcy and were saved only by international rescue packages.

New legislation that would give budget rules more teeth has been floundering for months as the European Parliament and EU member states have failed to agree on more automatic sanctions.

Trichet called Monday for those news rules to be strengthened further.

Separately in Brussels, a group of former European leaders and economists also called for closer economic and fiscal integration to save the currency union.

But the group, which includes former German Chancellor Gerhard Schroeder, former British Prime Minister Tony Blair and U.S. economist Nouriel Roubini — went further, demanding the creation of eurobonds. France and Germany, the eurozone heavy weights, have so far rejected issuing such bonds.

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Elena Becatoros in Athens, Gabriele Steinhauser in Brussels and David McHugh in Frankfurt contributed to this report.

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