- Associated Press - Monday, September 5, 2011

PARIS (AP) The eurozone needs a “quantum” leap toward economic integration, the incoming chief of the European Central Bank said Monday, as the bond yields of countries with shaky finances, such as Greece and Italy, jumped amid increased investor tensions.

Mario Draghi warned that measures like the bank’s buying of bonds to stabilize markets were only temporary fixes and that only substantially more integration would address the fundamental problem of a lack of coordination of the eurozone’s fiscal policies.

The movement in bond yields on Monday showed just how varied investors’ confidence was in different eurozone countries. Borrowing rates jumped in countries considered high-risk, such as Greece, Italy and Spain and fell in Germany, widely considered a safe haven in times of financial turmoil.

Speaking at a conference in Paris, Mr. Draghi dismissed the idea of eurobonds - debt issued jointly by the eurozone countries. Some have argued this would help weaker countries borrow more easily because they wouldn’t have to pay such high interest rates, which in turn make their debts bigger. But stable countries like Germany would likely see their rates rise.

Instead, Mr. Draghi suggested the eurozone should adopt rules that would require more budget discipline. There is already a proposal that would require all eurozone countries to balance their budgets. Profligate spending during boom times funded by cheap debt is one of the root causes of the current crisis.

Market tensions were high on Monday, both due to worries about some countries’ debt problems and a global financial sell-off triggered by concerns that the U.S. economy may slip back into recession.

The difference in interest rates between the Greek and benchmark German 10-year bonds, known as the spread, spiraled to new records on Monday, topping 17.3 percentage points. Yields on the Greek bonds were above 18 percent.

High yields mean borrowing is more expensive for Greece, making it even harder to reduce its debt load.

In fact, its yields are so high that Greece has been relying since last year on funds from a (euro) 110 billion ($157 billion) package of bailout loans from other European Union countries and the International Monetary Fund. On July 21, European leaders agreed on a second bailout, worth an additional (euro) 109 billion.

Italy’s own 10-year bond yields jumped to 5.45 percent amid signs that the government in Rome is wavering in its commitment to enforce its austerity program.

ECB chief Jean-Claude Trichet in recent days has called on Silvio Berlusconi’s government to push through with the deficit-cutting measures promised in August.

Italy’s stability is of particular concern because it would be too expensive to rescue for the eurozone. In an effort to steady the yields, the ECB has been buying Italian and Spanish bonds in recent weeks, driving down the interest rates.

On Monday, the bank announced that it had increased its purchases last week to (euro) 13.3 billion. That’s double the sum spent the previous week.

Mr. Draghi indicated that such makeshift measures would continue, including making sure the European Financial Stability Facility - the eurozone’s bailout fund - takes over the bond purchases and has enough cash in it.

But, not forever.

“The Programme [of bond-buying] is temporary and fully sterilized,” he said in the version of his speech published on the Bank of Italy’s website. “In other words, it should not be taken for granted by member states.”

The eurozone needs to quickly solve the root of their problems, he said.

“The crisis starts from the incompleteness of the European construction,” he said, and important reforms need to be made to solve it. “Overall, the aim of this effort should be a quantum step up in European economic integration.”

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