Germany opposes tighter fiscal ties

THE European Central Bank’s move to buy Italian and Spanish bonds to tame the region’s debt crisis marks a step toward the kind of fiscal union that Germany has opposed since the founding of the single currency.

While investors and economists say tighter fiscal ties and increased transfers to the financially weak euro states will be needed to end the financial contagion, purchases of Italian and Spanish debt that Royal Bank of Scotland Group estimates may reach €850 billion threaten fresh political fault lines. “This huge-risk pooling exercise will not come easily and the risk of political fallout will be large,” Jacques Cailloux, chief European economist at RBS, wrote in a note.

“This might be the necessary and painful step required to pave the way for the creation of a common debt instrument, the quid pro quo for this might be the loss of fiscal sovereignty.”