Mr Ayrault made clear the frustrations in the new socialist government over the handling of Greece by eurozone leaders, including the German chancellor, criticizing them for a “political weakness” and “a lack of vision”. I think Merkel is guilty of both of these things. She makes big, definitive statements, then undermines them a few days later. The people of Greece (and of Spain, Ireland and Portugal) deserve to know where they stand. The last Greek election was a farce because it was fought between a party that said it would simply cancel the debt with no consequences and a party that said it would renegotiate the bailout. Surely, if Merkel's "heart bleeds" for the Greeks, she's morally obliged to be straight with the Greek people. These are real people who can't make big life decisions - like whether to stay in Greece, whether to start a business, whether to start a family - because their country is in limbo. And it's in limbo because they don't know how much support they have from Germany. They don't have a clear way to stay in the EZ... they're just being strung along. Maybe it's good for her re-election chances - or her opinion poll numbers - but it's a lousy way to treat people.As things stand, we're still waiting for the Troika's official report into Greece's progress. Ayrault's comments add weight to the theory that Athens will be granted more support in the event that it has missed a significant chunk of its targets. We'll bring you reaction to Ayrault's comments as soon as possible.

Portugal is on the brink of abandoning its controversial plans to hike taxes on workers, in a victory for the huge numbers of people who protested a week ago. Pedro Passos Coelho, the Portuguese prime minister, is due to hold talks with employers and trade unions today to discuss alternative proposals. The public opposition to his plan to effectively slash workers' pay to fund lower taxes for companies appears to have forced Lisbon to change course.

The European Central Bank is in "panic" over the eurozone crisis and acting outside its mandate with its new bond-buying plans, the bank's former chief economist said in comments published Saturday. "The break came in 2010. Until then everything went well," Juergen Stark, the German who resigned from the ECB in late 2011 after criticising its earlier round of buying up of sovereign debt, told Austrian daily Die Presse in an interview. "Then the ECB began to take on a new role, to fall into panic. It gave in to outside pressure ... pressure from outside Europe." Mr Stark said the ECB's new plan to buy up unlimited amounts of eurozone states' bonds, announced on September 6, on the secondary market to bring down their borrowing rates was misguided. "Together with other central banks, the ECB is flooding the market, posing the question not only about how the ECB will get its money back, but also how the excess liquidity created can be absorbed globally," Mr Stark said. "It can't be solved by pressing a button. If the global economy stabilises, the potential for inflation has grown enormously." He added that "panic" about the eurozone breaking up was "nonsense" but that the only way to end the crisis was for member states to bring down their debts and implement structural reforms to boost economic growth. "Governments have recognised that returning to budgetary discipline is indispensable. Markets focus much more on whether states will be able to service their debts in five years' time," he said. Mr Stark quit in late 2011, following in the footsteps of former Bundesbank head Axel Weber, who stepped down earlier in the year from Germany's central bank because of unease about the ECB's policies. Mr Weber's successor Jens Weidmann was the only member of the ECB's policy-setting governing council to vote against the bank's new programme earlier this month. "Weidmann's arguments ... should not be made light of," Mr Stark told Die Presse. "The way in which his position has been publicly commented upon by the ECB leadership has crossed the line of fairness." Source: AFP

There isn't a banking union, and no chance it will happen

As regards any idea of a Federal Europe is concerned it's interesting to see what's happening in Spain which is apparently in danger of fragmentation......"Hundreds of thousands of Catalans took to the streets of Barcelona  in an unprecedented show of mass support for autonomy from Madrid, blaming Spain’s economic crisis for dragging their wealthy region down.The central government said the crowd was 600,000 strong. Catalan police gave figures as high as 1.5 million...They held up banners and signs saying “No to the Fourth Reich”, “No to Europe”, “Independence Now!” and “Catalonia: the New European State”.  Catalans complain of paying billions of euros more in taxes than they receive back from Madrid, even as their regional government has been forced to fire workers and cut services."  In general people don't like the idea of supporting other populations, even within their own country. Asking nations to do it within a federation simply won't work.  There isn't a banking union, and no chance it will happen. They're talking about common banking regulation and Germany has said 'Nein' to Draghi's suggestion.....Reuters - Schäuble said that, despite the current crisis in the Euro zone, the Euro will ultimately emerge as the common currency of the entire European Union. He said he “respects” Britain’s decision to keep the pound, but insisted that the survival and eventual stabilisation of the Euro will convince non-members to join the currency club. “This may happen more quickly than some people in the British Isles currently believe,” he added....I say: Yet another example of the EU apparatchiks trying to gain control of the UK's financial structure by stealth....(and the other non Euro countries) - but the UK is the big target here.   Come on Great Britain! ... cut the head off this serpent and tell the EU to bugger off ... you'll be doing yourselves a great favor, not to mention the rest of Europe...Does anyone in their right mind think trade with the UK will stop if they leave the EU?   The vast majority of UK exports come here to the USA, Germany second, then France. A vast majority of UK imports come from Germany, USA second, then China, Netherlands, Norway, and France.  50 million quid a day dumped into this black hole the EU, and for what?!  Will Germany stop selling to the UK if they drop out of the EU?
Hell no! it's a major part of their economy.

Monti is growing on me ..... He certainly plays a clever game - hitting the Germans with the dreaded inflation card. Why can't the smaller countries like Greece and Portugal find someone to fight their corner? Looks like we just have to hold on tight and hope that some crumbs from any Spanish/Italian gains will fall our way. That or revolution. Can't be much longer coming. Fresh wave of pay cuts and tax demands on its way and the weather's getting cooler...While Monti is keen to push down Italy's borrowing costs, Merkel is more concerned about reshaping the fundamental framework of the eurozone. That's certainly connected, isn't it. Merkel and the German ECB council member Asmussen already said that they both support the bond buying program. Weidmann will remain opposed and nobody will care as he's always been an idiot (scholar of the preceding idiot: Axel Weber). However, in the long term there must be a new framework. It will be crucial to get support for this, keep the process going and find the right moment to get the European people involved....WELL, i don't get this one bit. Where's this inflation coming from? Because the only place i can see it coming from is a weaker Euro due to unlimited money printing by the ECB to support the basket cases of Italy, Spain, Greece et al. It's just a vacuous comment.

Whether they do it by using the ESM to buy primary debt, or another SMP, it's just prining. I think Monti is trying to be too clever & will just paint himself into a corner.

EUROPE - Official data released this morning showed that the Spanish economy shrank by 1.3% in the second quarter of 2012, on a year-on-year basis. That's worse than the first estimate, of a 1% drop in GDP. The contraction in the first three months of 2012 has also been revised down to -0.6% year-on-year, from -0.4%. On a quarterly basis, Spain shrank by 0.4% between April and June, and 0.3% between January and March. This comes a day after Spanish GDP data for 2011 and 2010 were revised down, showing that Europe's fourth-biggest economy is in rather worse shape than feared. The news comes as Spain prepares to welcome the EC president, Herman Van Rompuy. He will hold talks with the Spanish PM, Mariano Rajoy, today: another piece of euro-diplomacy in the approach to key events in September. Spain is also holding an auction of short-term debt this morning, but that should go smoothly, given the recent recovery in Spanish sovereign debt.Angela Merkel has urged other politicians to rein in their criticism of Greece.

Elsewhere, political tensions remain high in the eurozone after a war of words over the weekend in Germany regarding Greece's future. Alexander Dobrindt, general secretary of the Bavarian sister party to Angela Merkel's Christian Democrats, began the spat by declaring that Greece would quit the single currency by 2013. But with the Bundesbank chair, Jens Weidmann, launching another full-throated attack on the European Central Bank's plan to buy Spanish and Italian debt – warning that bond-buying could be 'addictive, like a drug' – there's still no unity on how to address the crisis …

Smoke and smoke....

Every day I read in the Greek press about the bills that have not been paid by the government (doctors, pharmacists and other suppliers of services and goods. Their deficit for the first 7 months of this year is some 13bn. They are still predicting a shortfall of 1bn by year end - the difference made up by increased tax payments in 'second half' (it is 5 months - another Greek accounting error?) Dream on!  This is without accounting unpaid bills. For which they announced nearly 2 weeks ago that the government were only going to pay 'salaries and pensions' (so not doctors and pharmacists who are not employed).  There are differing reports about when the Troika will report - end Sept earliest, maybe Oct. Every day Greece is bleeding actual cash, apart from the increasing liabilities that it is incurring due to non-payment.  We all know that Greece has a Governor - Horst Rechengach , however as this subject is taboo, i'l say : even a Troika report, which one assumes will be based on a certain date snapshot, will be out of date before the print is dry.Hopefully they will include a cashflow prediction for the future months (negative?).  Never mind what Junker said about wanting Greece to stay in the EZ and waiting for the Troika report (I am sure he knows what it will say) instead concentrate on his comments on 'credibility' - he is a Banker and when bankers doubt credibility be "Very Afraid'

More from the IMF: "The external position of the Euro area as a whole has been close to balance, and only slightly weaker than the estimated value consistent with fundamentals and desirable policies. However, this masked, and continues to mask, substantial divergences across the Euro area primarily financed from within the union, including by major banks with global links. Germany currently has the world’s second largest current account surplus, partly with the rest of the world, while Spain and (to a lesser extent) Italy have deficits. Major estimated external imbalances that are regionally-financed imply a need for substantial real and financial rebalancing within the Euro area as well as a much more modest rebalancing by the bloc with the rest of the world. Unsustainably large intra-Euro area imbalances were part of the global boom-bust cycle, and the failure to resolve the Euro area crisis is causing heightened stresses that are spilling over to other countries". -- Germany is doing OK though, and have done since the Eurozone was created. No wonder Merkel wants to preserve the status quo. The eurozone is on life-support, it won't be long before the apparatus is switched off, but by then millions of people in Spain, Portugal, Ireland, Italy, Greece et al will have had their lives ruined by arrogant, stubborn eurocrats. ..... What's the youth population of Europe? Say, around 100 million people (depending on how you define youth) of which roughly 20 million are unemployed. Now take the quantitative easing (QE: new money printed and issued, a taxpayer liability) amounts given to the banks, and the other forms of money given to them in bank bailouts. £375 billion and counting in the UK. Don't have close to hand, the QE, bank bailout, and other monetary relief sums for the bad debt of banks given to Spain, Italy, Greece, Ireland, and Portugal. Let's take a conservative estimate of a total of £600 billion: divide this by 20 million and you have £30,000 per unemployed youth. The new money printed and issued by European governments if given directly to the public instead of the banks would certainly wipe out unemployment for at least a year or two. That would be even truer for the Non-Euro Countries, forget about the rest of Europe. But we the public are such stupid, apathetic sheep, we play along with this massive misdirection of financial resources by the states, done for the banks, at your cost.

closer scrutiny will reveal not just the mess but the dishonesty.

"Greece is planning to sell 6Billion Euro of treasury bills to cover its financing needs". This is on top of the 200billion + Euros advanced by the EU/IMF/discounted bond holders. The time must have arrived when someone asks the obvious question. What are they doing with the money? There is a follow up question just as mystifying. Who apart from the ECB is daft enough to buy Greek treasury the bills?

Italy - "In an interview today with Finnish daily Helsingin Sanomat, Mr Monti said that Italy might European rescue funds and the ECB to buy its sovereign debt. He told the paper:
"The basic idea is that Italy does not seem to need special aid right now, especially not to save its economy [but we may need some breathing space so] We're thinking of a possible intervention in various combinations involving the EFSF, the ESM and the ECB. "Is Monti using the same sort of euphemisms as Spain and its "bridging loans"? i.e. when is a bailout not a bailout? Bit of a strange time for a tour of Eurozone countries/leaders as well?

Germany wants decisive moves to political integration in return for further help not more and more verbiage about reforms that magically evaporate as soon as the noose is relaxed. After all, if Spain is so willing to make all these dramatic cuts why would they fear asking for a formal bailout with CONDITIONALITY...They are doing it anyway???The reason is, as we know, twofold:
1. they do not even intend to deliver on this verbiage, as they know the regions are out of control.
2. they are hiding an awful lot of bad stuff and fear closer scrutiny will reveal not just the mess but the dishonesty.

South Euro leaving the Euro would give them a chance to their currency / new currency to devalue .... TRUE and this will benefit their export and their GPD will got high sky! Unemployment in those countries will be drastically reduced. The opposite would happen to Germany whose new currency would increase value and ... BOOM! A new nation of unemployed people will come to life! Where would ***those*** (North Europe) unemployed go?? UK is the country i Europe with the highest private debt. Many people in the UK are very poor and live with social aids. These people are NOT considered unemployed while they are considered such in other countries! The UK government is running out of money and that's one of the reasons why we have a horrible NHS service. Many here in the UK are full of debt while in other Southern European countries they still have plenty founds in the banks. When those poor go abroad they *seems* to be rich but that's just an illusion created by a strong currency. True there are many wealthy people in the UK but they represent a minority and they are mainly concentrated in London. Most people living in Southern European countries are home owners while this can't be said for many Northern European countries. France is having HUGE problems at the moment --- Have a look to the REAL situation at http://markosun.wordpress.com/... ... and see where is the UK its real Total Debt (PUBLIC + PRIVATE) ratio is ... 398% of the GDP!!!
Italy has a 124%, Spain 157%, Germany 143%.
True the UK is a very powerful country but don't forget Italy is part
of the G7 and never asked/needed any help.
Japan has GDP/PUBLIC DEPT ratio of 220%, which is the highest in the world, about double of Italy and 3.5 times more than Spain.
In conclusion ... everyone can think what they want but ...when you make your considerations get first the full picture of the situation.
Remember also that Germany is playing a dirty game with Southern European countries. Germany is happy to have a weak Euro as it helps their export. At the same time they want to keep the bond market separate to the other countries. Very selfish. Final but not last .... the UK has been struggling with unemployment. Think to what it will happen here when the Olympic bubble will be gone in few weeks time ....
Having said this ... I really hope the best for our beautiful UK but the future is getting darker.

Meanwhile Euros are fleeing Europe

How to kite $60 Trillion in Euro debt that cannot be repaid. Clearly the government must capture the private banks and force them to purchase the worthless sovereign bonds. Meanwhile Euros are fleeing Europe before "capital controls" confiscate savings accounts. .... The top finance officials from Germany and the United States urged co-operation in the fight against the eurozone debt crisis after a meeting on Monday that fuelled hopes Europe is preparing decisive action. In a joint statement, US Treasury Secretary Timothy Geithner and German Finance Minister Wolfgang Schaeuble expressed "confidence" the eurozone could carry out the reforms needed to escape the two and a half year debt crisis. They emphasized "the need for ongoing international cooperation and coordination to achieve sustainable public finances, reduce global macroeconomic imbalances and restore growth," said the statement, issued after the meeting on the northern German island of Sylt.

I just absolutely HATE having these two unelected bankers, who think they are so much smarter than anyone else, determining the fate of the world. They were in large part responsible for the collapse of the world's economies and now our governments are giving them a free hand to get us out of it. Problem is, their solutions always mean that taxpayers get to pay, pay, pay and their banker buddies walk away with a bigger bonus. Is there nothing the citizens of the world can do to rid themselves of these vampires? Has every government on planet earth sold out to them? - - - YES, YES and YES !!!

The ECB declined comment on Friday

"Private creditors have already suffered big writedowns on their Greek bonds under a second bailout for Athens sealed in February, but this was not enough to put the country back on the path to solvency and a further restructuring is on the cards. The latest aim is to reduce Greece's debts by a further €70bn to €100bn, several senior eurozone officials familiar with the discussions told Reuters, cutting its debts to a more manageable 100pc of annual economic output. This would require the European Central Bank and national central banks to take losses on their holdings of Greek government bonds, and could also involve national governments also accepting losses. The favoured option is for the ECB and national central banks to carry the cost, but that could mean that some banks and the ECB itself having to be recapitalized, the officials said. The ECB declined comment on Friday".

Spain is Bust. Italy is pretty much bust and if the truth be told is bust. Ditto Portugal.. Greece is just the weakest and as such fell first.
You have to let people including Governments fail if they are incompetently run. Let them go to the wall and any bank that was dumb enough to buy debt from these States.

The Euro and the EU itself have never been about what the 'Germany' or 'Spain' or 'The UK' wants, it is only what the leaderships of those countries want, even in the face of popular votes against the EU.

"Germany" ( read Germans ) will not decide anything, the people will never be given a say, much like the rest of the peons across Europe.

Of course Germany wants to save the Euro, but will only do so if they are able to maintain their 'advantage' in the export markets to other Euro and EU states. One disadvantage for Germany would be if the Eurozone countries decided to allow the ECB to start buying the sovereign bonds of the indebted countries. Germany will never allow that to happen as it would mean that they would have to share a much bigger burden of the Eurozone "collaterized" debt than they do at present. It's called German self preservation....Unfortunately, it still appears as though Europe’s top policymakers – that is, the Germans – are trying to “muddle through”, as opposed to coming up with a good, powerful solution. To understand this situation, it is instructive to reflect on Spain’s “problems” in comparison with those of Greece and perhaps Ireland. While Spain’s widely cited problems of high unit labour costs and current account deficit are symptoms of it sitting inside a rigid currency zone, before 2007-08 these problems existed but were not highlighted. They were seen as an understandable consequence of a monetary union such as the euro area.

The euro has completely broken down as a workable system and faces collapse with “incalculable economic losses and human suffering” unless there is a drastic change of course, according to a group of leading economists. Europe is “sleepwalking towards disaster”, according to the 17 experts, who warned that over the past few weeks “the situation in the debtor countries has deteriorated dramatically”. “The sense of a never ending crisis, with one domino falling after another, must be reversed. The last domino, Spain, is days away from a liquidity crisis,” said the economists. They include two members of Germany’s Council of Economic Experts and leading euro specialists at the London of School of Economics, all euro supporters. “This dramatic situation is the result of a eurozone system which, as currently constructed, is thoroughly broken. The cause is a systemic failure. It is the responsibility of all European nations that were parties to its flawed design, construction and implementation to contribute to a solution. Absent this collective response, the euro will disintegrate,” they added in a co-signed report for the Institute for New Economic Thinking. The warning came as contagion from Spain pushed Italy’s borrowing costs to danger levels, with two-year yields rocketing 40 basis points to more than 5pc. The Milan bourse tumbled 3pc, led by bank shares. Italian equities have been in freefall since it became clear two weeks ago that the EU’s June summit deal had failed to break the nexus between crippled banks and sovereign states.

The crisis is starting to ricochet back into Germany, where the PMI manufacturing index for July fell to its lowest since mid-2009. Doubts are emerging about the creditworthiness of the German state itself.

Well, I never thought I would admit it, but I am just another old “saddo” who writes all these comments with passion. This whole European saga goes on and on. We have seen our European leaders go through a wide spectrum of so-called solutions to the euro crisis, with tax hikes, austerity, unsustainable borrowing, a European central bank, and several other “solutions”, but the end result is always the same – the weaker countries get weaker, and even the almighty Germany now faces a downgrade by the credit rating agencies, because of their exposure to the debt crisis. There is only one solution to Europe’s problems, and that is to drop the idea of a single currency. In principle it was a great idea, but in practical terms it could never work. There is simply no way that each and everyone of the European economies with such widely different economy bases, from manufacturing to tourism, and many in between can hold the value of the euro to within the tight limits imposed. Almost all of Europe needs growth and increased tax revenue. This cannot be achieved against a background of high unemployment and businesses closing down. To create growth and tax revenue most of Europe needs to devalue its currency, but this is not possible whilst they have to adhere to the demands of the single currency. Despite several comments saying that the euro will survive, all I can say is they are wrong, the euro can't and never ever could work across the many different economies all across Europe. Make no mistake about it until the financial markets see that there is a credible solution to create growth and increased tax revenue across Europe as a whole, they will continue to remain in turmoil..... An association representing German banks has called for an extra year to implement tougher rules that would force them to hold more cash as a buffer against possible financial crises. The BVR group of private and public banks called for a delay until January 1, 2014 for the entry into force of the so-called Basel III regulations due to the "enormous technical restructuring and implementation work" needed. The planned implementation at the beginning of 2013 was "no longer realistic" said the group.

Eurozone leaders hoping for a quiet few weeks will be sorely disappointed. Short-selling bans on banking and insurance stocks by financial authorities in Rome and Madrid are a sure sign that all is not well, although I fear that these restrictions will only offer the most temporary of respites. After the summit in June that provided a brief burst of euphoria, there were mutterings that the crisis was not over, and the pessimists have now been proved right..... after a particularly grim day, European markets have closed and its time to rake over the pieces.....Growing fears that Spain could need a bailout, worries about whether Greece will get more money or will instead quit the eurozone, and a drop in EU confidence have conspired to sent shares and the euro sharply lower and bond yields higher. News of a ban on short selling in Italy and Spain - whether misguided or not - seemed to help haul markets slightly back from the brink. We may rapidly be approaching a decisive moment for the eurozone; previous bailouts were of smaller countries that were of manageable size. Spain is a different order of magnitude entirely, and it may not be possible to rescue this economy in the same way that Greece, Ireland and Portugal were bailed out. Eurozone leaders will likely hold yet another summit, but they will need more than fine words if they are to truly save the single currency.

The proposed creation of a single euro-zone bank supervisor is shaping up to be a test of the willingness of countries to give up national powers for the sake of the euro. Though still in its infancy, the effort—which envisions a key role for the European Central Bank in supervising the bloc's largest and most internationally active banks—faces hurdles as officials try to streamline a patchwork of regulators and supervisors numbering in the dozens. German central bank officials are reluctant to add another responsibility to the ECB that might weaken its anti-inflation vigilance. French bank executives worry that a Europe-wide supervisor wouldn't take into account the unique ownership structure of some banks. Behind a painted fence, the new European Central Bank building rises in Frankfurt. A banking supervision plan sees a key role for the ECB. "It will be a test case, so they'd better pass the test, otherwise it would put euro area in danger," says Daniel Gros, head of the Center for European Policy Studies, a think tank in Brussels. German Chancellor Angela Merkel has made the creation of a new euro-zone banking supervisor under the aegis of the ECB a precondition for agreeing to let Europe's bailout fund re capitalize banks directly, rather than indirectly via loans to national governments. Such a European financial backstop for banks would alleviate pressure on countries with banking crises, such as Spain and Ireland, and would correct one of the omissions in the design of the euro that economists say has made the currency union unstable. Creating a single supervisor would require countries to give up some of their sovereignty over how their banks are regulated.

EUROPE - Eurozone ministers, taking part in a conference call, approved a memorandum of understanding with Spain, which will be signed in the coming days. The aid will be fully disbursed by the end of 2013. "We have formalized what we discussed in the past two Eurogroup meetings," Luxembourg's Finance Minister Luc Frieden said after the conference call. "We have formally approved the memorandum that lays out the conditions under which Spain can be lent money for the overcapitalization of its banks. "The approval of all 17 ministers is there, and that means that the program can continue. Money will not flow immediately, because work on the analysis of the specific banks is ongoing." Also on Friday, Spanish Treasury Minister Cristobal Montoro said the country's recession would drag on into 2013, although the economy would not perform as badly this year as previously thought. The government now expects the economy to contract by 1.5% in 2012 and by 0.5% in 2013. It had previously forecast contraction of 1.7% this year and growth of 0.2% next year. An audit of Spanish banks by consultancy firms Oliver Wyman and Roland Berger, published last month, showed the banking sector needed up to 62bn euros in aid. A second audit and new stress tests, to be published in mid-September, will help determine how much money each bank needs. Spain's three biggest banks, Banco Santander, BBVA and Caixabank, are not thought to need money, but some 10 others may do. Shares in leading Spanish banks were all down around 7%, although Caixabank fared relatively better, falling by 3.6%, and Bankia did worse, falling more than 10%. The worsening position of many lenders was underlined this week when Spain's central bank disclosed that they had 155.84bn euros of loans on their books in May that are at risk of not being repaid in full. The figure is the highest since 1994, and represents about 8.95% of total lending extended by Spanish banks. Worries about the economy were compounded on Friday when Valencia's vice president, Jose Ciscar, confirmed that the eastern coastal region was asking Madrid for aid. He and Spanish Treasury Minister Cristobal Montoro refused to call it a bailout, however."Just as other regions are, Valencia is suffering from the consequences of liquidity restrictions in the markets as a result of the current economic crisis," Mr Ciscar told reporters.(source BBC news)

IMF calls on ECB to act --- The International Monetary Fund is pleading with the European Central Bank to do more to fix the eurozone crisis.  In a report released at 2pm, the IMF said the ECB could, and should, do more to prevent the euro unravelling, arguing: The ECB can provide further defences against an escalation of the crisis.

Its recommendations included :

• considering further interest rate cuts• A "sizeable" quantitative easing package, to stimulate the eurozone economy

• giving the ECB full 'lender of last resort' powers

• restarting its Securities Markets Progamme (to buy up peripheral sovereign debt)

Suggestions 2, 3 and 4 are unlikely to be welcomed by stronger members of the eurozone (think Germany, Austria, Finland...) who could also fear that lower interest rates would drive inflation up.

The IMF, though (which expects the eurozone to contract by 0.3% this year) is again insisting that the ECB must do more: These could include policies to support demand in the short run and fend off downside risks to inflation, as well as measures to ensure that monetary transmission, currently impaired by financial stress in some countries.

There are problems with the IMF's suggestions, though. QE would probably drag down the yields on safer bonds (awkward, when some are in negative territory already), while Germany is wedded to the idea that closer fiscal union needs to be arranged before the ECB is granted more powers.

MADRID (source : WSJ)—Spain's new central bank chief said the bank failed to act swiftly after the country's housing market crashed half a decade ago, a rare show of self-criticism of national institutions that comes as Spain enters the last stretch of negotiations on the details for a banking bailout.

Bank of Spain Gov. Luis Maria Linde's speech in Parliament on Tuesday was his first significant statement since he was appointed by conservative Prime Minister Mariano Rajoy a month ago, replacing Miguel Ángel Fernández Ordóñez , a Socialist appointee. It also is an indication that Spain's political elite is starting to come to terms with the unexpected collapse of what was once called "the Spanish miracle," largely driven by mounting problems in a banking system that many had once hailed as one of the world's strongest, even after the 2008 Lehman Brothers' bankruptcy.

Senior Spanish officials, faced with growing popular resistance to more austerity cuts, until now sought to pile pressure on European Union institutions to do more to help the euro-zone's fourth-largest country. Mr. Rajoy and other members of the government have said Madrid has done its part and EU partners, together with the European Central Bank, must now do theirs to ensure that Spain's borrowing costs fall from the current unsustainable levels.

Finance Minister Luis de Guindos kept up that refrain Tuesday, saying at a public event that the EU's "extremely slow" decision-making process is hindering Spain's recovery.

Relations between the government of Mariano Rajoy and Brussels, as well as some other European governments, have been occasionally awkward since it took office in December. Mr. Rajoy was seen as moving slowly on dealing with a budget deficit, and as having stumbled in its handling of the banking crisis.

The new Spanish prime minister upset fellow leaders when he announced a "sovereign decision" to increase Spain's budget deficit target for this year, and comments by other Spanish officials about other governments' duties to Spain have irritated their counterparts. This was followed by newspaper reports suggesting Italian Prime Minister Mario Monti blamed Spain for heightening Italy's crisis.

The monthly survey of funds by Bank of America Merrill Lynch has picked up a sudden crumbling of confidence in the eurozone core, with France viewed as the country most likely to deliver a nasty surprise later this year. Europe’s debt crisis is by far the biggest worry worldwide, with the US “fiscal cliff” and China’s property slide well behind.

A net 32 of money managers expect trouble in Germany, a dramatic reversal since May. The worries may be linked to the Bundesbank’s rocketing claims on eurozone central banks under the ECB’s “Target2” payment system, now €729bn (£572m). These reflect the scale of capital flight from the Club Med bloc, and may prove hard to collect if the euro blows apart.

A net 55pc expect a bad surprise from France, which has $710bn (£456bn) of bank exposure to Club Med. President François Hollande is courting fate by raising the minimum wage, employing 60,000 new teachers and clinging to a largely unreformed state that takes 56pc of GDP.

While investors seem willing to overlook the leisurely pace of fiscal tightening, they may be less forgiving of Mr Hollande’s nonchalance over France’s relentless loss of global competitiveness.

The growing doubts about Germany and France have not yet surfaced in the debt markets. Short-term borrowing costs have turned negative in both countries. The immediate flight to safety has overwhelmed all other effects.

emerging economies are flagging

Fears that the world's most powerful emerging economies are flagging have gained ground after Brazil and South Korea cut interest rates to boost growth.

Brazil cut its main interest rate to a record low of 8% on Thursday, while South Korea shaved 0.25% off its benchmark rate to 3%.  The 0.5 percentage-point cut by the Brazilian monetary policy board (Copom) comes as policymakers scramble to revive an economy that has failed for nearly a year to respond to stimulus measures. It was the eighth consecutive cut since last August, when the rate stood at 12.5%.  Until last summer, Brazil, like many emerging economies, was suffering from a massive influx of funds in search of bumper returns. An oil and agriculture boom encouraged huge investments in the financial sector and other areas that promised quick returns.  The worsening of the eurozone crisis reversed the trend as fund managers sought havens such as US and German sovereign bonds. Trade with the US maintained economic growth for several months, but recent surveys have shown a combination of a faltering US economy and the eurozone crisis have dampened the demand for Brazilian goods. On Wednesday, government data showed that retail sales plunged in May, undermining hopes for a sector that Brazil's government had long hoped would keep the economy alive. The slower-than-forecast recovery in the world's No 6 economy and a moderate pace of inflation have bolstered the case for the continuation of Brazil's aggressive rate-cutting cycle, economist said. "At this moment, Copom believes the risks to the inflation outlook remain limited," the bank said in its decision statement, which was identical to the one after its previous rate-setting in May, when it also cut by 50 basis points. The language used in the statement left the door open for more rate cuts, analysts said.