Eurozone differences are still unresolved

This week Ireland had a very successful bond auction. The fact that there were €44.5bn worth of offers for €5bn worth of bonds suggests that investors have rediscovered their faith in the Irish economy, but unfortunately things are not that simple. Ireland's bonds were so popular because they are supported by the EU's new bailout fund, the EFSF (European Financial Stability Fund). And not only is this fund backed by 13 of the Eurozone members, but well over half of the €440bn that makes up the fund comes from European states which have AAA credit ratings: indeed €119bn, or 27%, comes from Germany alone. So the markets weren't really buying Irish debt – they were buying German. And they were doing it at a discount rate, for less than it costs to buy real German debt.

These problems are at the heart of the big struggle between Eurozone powerhouse Germany and the European Commission. Angela Merkel and Commission President Jose Manuel Barroso are at loggerheads over Barroso's desire to get the EFSF reformed at next Friday's EU Heads of State summit. Merkel wants to wait for two reasons: First, as the Irish bond auction illustrated, Germany is being put in a difficult position through the EFSF. It wants to wait until the next EU Heads of State summit in March to look at the issue and prepare a broader set of measures which force struggling states to agree to strict, standardised, fiscal controls. Secondly, parts of Germany are going to the polls in the upcoming months, and Merkel cannot afford to be seen to be bailing out the rest of the Eurozone and getting nothing in return.

The fundamental differences in Eurozone economies and the divide between the fiscally 'responsible' northern states like the Netherlands and Germany and the indebted southern states like Italy and Portugal have yet to be resolved. The recession and the creation of a permanent bailout fund have just brought them to the fore.