Fiscal union blueprint fails to calm financial markets

Spanish and Italian borrowing costs soar despite EU proposals for eurobonds

Alarmed investors continued to push up the borrowing costs of Spain and Italy yesterday to dangerous levels, despite leaks of an official blueprint for closer fiscal union in the eurozone.

A draft of a report prepared by the presidents of the European Council, Commission, the Central Bank and the Eurogroup suggested eurozone nations should adopt eurobonds and a common treasury in the medium term. It also said Europe should move to a banking union.

Investors have been calling for European leaders to adopt these measures and make it clear they are willing to use their collective resources to ensure the single currency's survival.

But markets drew no comfort from the draft report yesterday. Spain's short-term borrowing costs nearly tripled at auction, with Madrid forced to pay 2.362 per cent to borrow for three months. Italy's short-term borrowing costs also spiked, with Rome forced to pay 4.712 per cent to offload two-year debt, the higher price since December.

The two nations' longer-term borrowing costs were also up, with 10-year Spanish bond yields shooting back up to 6.85 per cent and Italian 10-year yields over 6.17 per cent.

Market sentiment was not helped when reports emerged that the German Chancellor, Angela Merkel, had told a meeting of her increasingly Eurosceptic coalition partners that Europe would never have shared debt liability "as long as I live". This was followed by reports that the Italian Prime Minister, Mario Monti, had threatened to resign if Mrs Merkel did not yield on this issue.

However, there were also reports that Germany might be willing to allow the incoming bailout fund, the European Stability Mechanism, to be stripped of its preferred creditor status, which could make investors less nervous about bonds of bailed out nations.

The president of the European Commission, Jose Manuel Barroso, told businessmen in Brussels that further fiscal integration was the only way to stabilise the situation. He said: "The world expects Europe to commit to credible and concrete solutions to become more integrated and more united. We are now in a defining moment for European integration. We must articulate the vision of where Europe must go and a concrete path for how to get there."

Finance ministers from Italy, France, Spain and Germany were summoned to Paris last night at the last minute in an attempt to smooth the ground for agreement ahead of tomorrow European Union leaders' summit.