http://fxtalks.blogspot.com/2010/05/barbarians-at-gate.html#links

I think what Europeans have to worry about, and especially Spain, is not the “extra-Eurozone nations with their own agendas and interests”, but the INTRA EUROZONE nations with their own agendas and interests. Germanys and Frances interests are directly opposite to Greeces and Spains, and even Italys for that matter.

International investors know the only mandate of the ECB is price stability, so as far as inflation is under 2% there is no problem for a weaker Euro. With Eurozone inflation under 1% we can expect a next interest rate cut from the ECB, perhaps as large as 1% if Greece and Spain go ahead with projected budget cuts. That would be a good exchange. An important stimulous from the E.C.B. in exchange for buget tightening. At the same time, that would lead to a weaker Euro which will increase Eurozone exports to the rest of the World.

But it is true that the same way the U.S. doesn´t call the I.M.F. to rescue California, then the Eurozone will need its own mechanism without the interference of third parties, extra-Eurozone nations with their own agendas and interests.

This week we are witnessing a new attack to the British pound as a consequence of both a large UK budget deficit (-12% according to The Economist) and high inflation (3.5% according to The Economist), something which will lead the Bank of England to raise interest rates which can curtail the incipient recovery.

A weak currency like the pound, a large deficit, an increase in the price of the oil barrel; British inflation surpassing 3% compared to the 1% in the Eurozone means the UK is losing competitiveness even if the weak pound was at first an opportunity for exporters.

Before the Euro international investors would have attacked the drachma or the peseta…but know that is not possible because drachmas and pesetas doesn´t exist. There is no possibility to speculate with drachmas and pesetas as they did with thai bahts, argentinian pesos or british pounds.

The British pound will continue being battered until the Bank of England starts raising interest rates again, and that will happen during the next months.

Meanwhile, the Eurozone still has margin to cut interest rates at least twice: 0.5 points each time.

Moreover funds collected under a financial transaction tax (a kind of VAT at EU level -EU budget additional own resource – with a Pigouvian character) could also, via a EU fund (European Monetary Fund ?), cover the issuance of EU bonds.

Thus the most effective solution to the present EU sovereign debt crisis would be to issue jointly EU bonds to refinance gradually all the maturing debt of Greece and other PIGS. This would not only significantly reduce the cost of financing of PIGS debt, while creating a EU bond market, but it would replace any International Monetary Fund role and/or conditional loans.

The devil is in the details of the above scheme which would in any case comply with treaties. Euro bond can’t solve all problems of deficits, but a common, joint and/or coordinated issuance and use of EU bonds (including recapitalization of banks, European budget, common guarantee funds, EU projects, rescue loans and packages, IMF resources, etc.) could also create an efficient and effective bill or bond euro zone market. Different arrangements could then be studied concerning the issuing institution (single issuer) or coordinated agencies and its guarantees. A bond clearing house, i.e., a vehicle for sharing information to improve fiscal coordination could also be set up under EU umbrella. Some of the technicalities and arrangements would be the same as for the introduction of the Euro as a common currency.