ECB intervention is necessary

Eurozone leaders need to take bold, decisive action to quell market fears.  Their lack of effective action is fuelling a run from the assets of weaker economies.  The longer Angela Merkel et al are indecisive, the scale of action that will be eventually required will keep on rising.  Even the election in Spain that delivered a thumping mandate for the People's Party who are firmly committed to austerity and reform did not slow the country's rise in borrowing costs.  Their yields on ten-year bonds are above 6.5%.  A similar story can be painted in Italy: the appointment of technocrat, Mario Monti has not seen much success with bond yields either.  Borrowing costs also rose notably in Belgium and France.  Germany, the country of "safe assets", only managed to sell 60% of ten-year Bunds at auction.

The problem is that Eurozone leaders are pursuing the wrong strategy.  They are talking about long-term strategies to reform the Euro: greater fiscal integregation and increased fiscal governance.  However, these policies do not have enough immediate effect.  The ECB is their best bet for quelling fears.  It needs to step in as the lender of last resort and offer unlimited liquidity to banks and pursue large-scale bond buying.  This will calm the markets and investors will be more confident buying sovereign debt from the peripheral economies.  This increased demand for bonds will reduce the bond yields.  Germany needs to overcome its inflation memories of the 1930s and overcome domestic political opposition regarding constitutional issues - because the consequences of not doing so are far too great: the break up of the Euro.