While the European Economic Summit failed to provide any earth-shattering revelations this week, the topic of joint euro area bonds has re-emerged and seems to be garnering support with many political leaders. While Merkel and the rest of Germany remain opposed to the idea, Italian Prime Minister Mario Monti was quoted in an interview yesterday saying that there is still a possibility Germany could be persuaded to accept the prospect of some sort of jointly issued bond. Germany has been fighting to make periphery nations in the EU accountable for their spendthrift ways; however, the increasingly high interest costs investors have demanded as periphery nations deal with austerity has made the cost of carrying the cumbersome debt loads too much to bear in some cases. The current rhetoric from Italy, and the other struggling nations, is that the EU must provide a united front, except for the fact that the idea of formally issuing bonds backed by the whole of the zone would effectively communalize the debt, and do nothing to address the moral hazard issue which started the excessive borrowing in the first place.
Another proposal that has been drafted to tackle the European debt crisis is a tweak of the Eurobond idea. The idea of a European redemption fund was initially drafted by Merkel's economic advisers back in November and outlines a plan where participating countries would be able to transfer any debt in excess of 60% of their economic output in exchange for constitutional commitments on economic reform. The fund would be backed by gold reserves of euro zone member countries, making those funding countries jointly and severally liable. The Germans seem more open to the type of structure proposed with the redemption fund, as Merkel and the leader of the Social Democrats have agreed to review the idea in greater detail before their meeting next month.
In other euro zone news, a Public Issue Poll presented in Athens yesterday did little to clarify the already confusing political situation, as conflicting responses showed the Greek people are having a hard time figuring out what they want. The anti-bailout party Syriza is now at a polling record high, garnering 30% support, with 62% of respondents against the terms of the already negotiated Greek bailout. All this considered, 85% of people polled still want to remain in the EUR, which under all likelihood cannot happen if current bailout terms are reneged on. With the outlook for the zone as murky as ever, the EUR has run into a new wave of selling pressure, giving back its gains from overnight trade and making a run at the 1.25 handle.