What the newfound optimism over the Eurozone ignores, among other things, is the raw data. Bond yields are up today for Italy and Spain, which hasn’t been discussed as much but which is a real issue. Spanish 10-year yields are at 6.1% (the highest level since August). Italy’s are holding at 6.7%. So there’s not a ton of difference here. And both numbers are bad.

The European Central Bank’s initial solution to this problem has been to buy up Italian and Spanish debt themselves. However, they made a big show of running down the idea, and offloading some of the risk to private partners. This is a dumb idea. The ECB is basically dying to exit the market, at which point, because of their own communications on the matter, the yields will rise. They’ve backed themselves into a corner, and created the conditions for a flight from those bonds, which raises the prices even while they stay engaged in the market.

The real beneficiaries of the ECB have not been sovereigns, but private banks:

Since the beginning of the financial crisis, the E.C.B. has been lending euro area banks as much money as they want, trying to maintain the liquidity — or continual flow of money — that is the lifeblood of the global financial system.

But because the bank has refused to offer the same easy lending service to countries like Italy and Spain, it is not confronting the euro area’s most fundamental problem. And so, the governments saddled with debt are having to pay high prices to borrow money on the open market [...]

At least so far, the E.C.B. has not done the one thing that could help calm that fear: declare that it stands ready to be the de facto lender of last resort to national governments.

They are staunchly resisting such a strategy. The president of the Bundesbank, Germany’s central bank and an influential player on the ECB’s central governing council, came out and said today that using the ECB as the lender of last resort would be illegal. Jens Weidmann said, “Monetary policy cannot and may not solve the solvency problems of governments and banks.”

But European policies are creating the solvency problems of governments, through a reliance on austerity (check out the new statistics on Eurozone factory orders; they’re at the lowest level in over two years). And the ECB is actually helping out the solvency problems of banks, as they have been doing for years.

The ECB is still frightened by the inflation phantom, and has completely targeted their policies toward this, at the expense of the fiscal health of the entire world. This is a completely needless recession coming for Europe.

More elite failure.

UPDATE: One interesting side note. Today Angela Merkel’s party in Germany, the CDU, voted to allow Eurozone members to exit from the currency union. This sets in motion a process to make this the official policy of Germany. That could actually lead to a partial Eurozone breakup. It bears watching.