by Calculated Risk on 7/30/2012 09:10:00 AM

Spanish 10 year bond yields are down to 6.61% this morning. Italian yields are at 6.03%.

A few articles and comments on Europe, first from Tim Duy: Fed Watch: The Euromess Continues

Excitement is almost guaranteed this week, with both the Federal Reserve and the European Central Bank pondering their next moves. At the moment, I am more fascinated with the latter, as it represents the more fast moving policy failure for the moment. In response to that disaster to date, it is now widely expected that the ECB will deliver a significant policy expansion, possibly accepting its responsibility of lender of last resort for sovereign debt in the Eurozone. I think it is widely believed that this will be the turning point in Europe. In some ways, yes, as it would keep the threat of imminent dissolution at bay. But the Eurozone will still be fundamentally hobbled by a devotion to re-balancing via austerity-driven internal devaluation. This does not offer a promising long-run outcome.

From Paul Krugman: Crash of the Bumblebee

First of all, Europe’s single currency is a deeply flawed construction. And Mr. Draghi, to his credit, actually acknowledged that. “The euro is like a bumblebee,” he declared. “This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years.” But now it has stopped flying. What can be done? The answer, he suggested, is “to graduate to a real bee.”

Never mind the dubious biology, we get the point. In the long run, the euro will be workable only if the European Union becomes much more like a unified country.
...
But the creation of a United States of Europe won’t happen soon, if ever, while the crisis of the euro is now. So what can be done to save the currency?

From Reuters: Euro zone crisis heads for September crunch

Over the past couple of years, Europe has muddled through a long series of crunch moments in its debt crisis, but this September is shaping up as a "make-or-break" month as policymakers run desperately short of options to save the common currency.

Crisis or no crisis, many European policymakers will take their summer holidays in August. When they return, a number of crucial events, decisions and deadlines will be waiting.

From the WSJ: Greece Seen Facing €30 Billion Shortfall

Greece's chronic recession and the receding hope of an economic recovery in the next two years have blown a hole of at least 30 billion euros ($36.85 billion) in its financial rescue plan, officials familiar with the situation said.

The officials argued that the findings indicate a need for official creditors to write down their claims by at least that amount if they want to keep Greece in the euro zone, as well as finding new money to fund the country for longer. The officials represented two of four parties to the talks: the Greek government and the "troika" of the European Union, European Central Bank and International Monetary Fund.
...
"The haircut on private holders has proved not to be enough," said one official involved in the next round of talks.