Yesterday was a day of remarkable clarity and transparency.
The day began with the publication of a European Commission paper on the creation of a unified European bond. The EC's press release was blunt about the purpose and implications of the initiative.
Such common issuance of bonds by the euro-area Member States would imply a significant deepening of Economic and Monetary Union.
It would create new means through which governments finance their debt, by offering safe and liquid investment opportunities for savers and financial institutions and by setting up a euro-area wide integrated bond market that matches its US Dollar counterpart in terms of size and liquidity.
The fiscal framework underlying EMU would similarly undergo a substantial change, as Stability Bonds would need to be accompanied by closer and stricter fiscal surveillance to ensure budgetary discipline.
....(A)greement on common issuance could have an immediate impact on market expectations and thereby lower average and marginal funding costs for those Member States currently facing funding pressures.
The Commission believes that a single debt issuance agency will resolve the European sovereign debt crisis, but it will only do so, if fiscal policy decision-making becomes more centralized. While this may be a contentious claim, it does accurately reflect the thinking of the Euro-federalists.
The next big event yesterday was the German bond auction. It went very badly. The German government was unable to sell about 35 percent of the €6 billion of the 10-year bonds it offered to the market. If Germany, with its well run economy, can not sell its debt, then what does that say about the prospects for a European stability bond?
The market had a straightforward answer for that question. A centralized European bond issuance would mean that German tax payers would have to underwrite Italian, Spanish and Greek fiscal deficits. While Germany might be a successful economy, it isn't so large that it could easily shoulder the burden of southern European fiscal extravagance.
Bond markets have concluded - correctly - that a European stability bond would undermine German fiscal sustainability; hence, the sudden reluctance to buy German debt. Centralizing debt redistributes the burden around Europe, but it does no reduce the overall level of Eurozone debt. Therefore, the appetite for German bonds suddenly fell.
Will the European Commission get the opportunity to issue their stability bonds and centralize European fiscal policy?
When Mrs Merkel addressed the German parliament yesterday, she was also very clear. The answer was a very firm no.