Eurozone fragmenting faster than EU can act

By Paul Taylor

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Good riddance.

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Agreed. But I hae to question, the economic union as far as im aware -predating the EU of today- is doing fine, as far as im aware free trade throughout the EU is still business as usual. it is the monetry and political union that is fragmenting.

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The interest rate gap between north European creditor countries such as Germany and the Netherlands, whose borrowing costs are at an all-time low, and southern debtor countries like Spain and Italy, where bond yields have risen to near pre-euro levels, threatens to entrench a lasting divergence.

When interest rates for the southern states reach pre-Euro levels, it looks like a normal market reaction. I can't see any reason why they should be lower. It is certainly painful for the affected countries, but it's futile to work against market dynamics. What worries me more are the extremely low interest rates for the northern countries. It shows that the money with which the ECB is flooding the markets doesn't go where it is intended. Without extreme fiscal discipline in the northern countries, we will watch the next crisis evolve there.

Since government credit ratings and bond yields effectively set a floor for the borrowing costs of banks and businesses in their jurisdiction

For banks in the Euro-zone this is only true if the banks hold a considerable amount of their own country's government bonds. A little bit more differentiation would be helpful in the discussion.

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