Common EU bond - A little too late

Spreads on EU bonds have widened significantly which means the market is pricing in greater credit greater differentiation across countries. Sovereign risk exists because the ability for each country to finance debt has greater uncertainty.While there is a single currency, there is no single fiscal policy and no monolithic economic behavior across the economies. Productivity is different. Taxes are different. Cost structures are different.

While it may have been possible for countries to agree on a common bond when the risk differences were minimal, it is almost impossible for it to occur when there are wide spread differences. Germany would have to be willing to increase their funding costs to the average across the EU. The burden of payment would also fall on those which have the best economies at this point. The strong EU countries would be bailing out the weak.

Yet, there are limited choices because all of the credit risky countries do not have any monetary tools available to them. The ECB is not structured to handle risks like this in the EU. The result is that the euro has been a weak currency because EU policy coordinated is limited by the government structure in place.