A weighted average of 7-10 year sovereign yields in 12 Eurozone markets – calculated by Datastream using debt weights – is at its highest level since 2008, having surged by 100 basis points since early September. This represents a substantial tightening of financial conditions warranting a monetary policy response ideally combining a large cut in official interest rates with country-neutral QE aimed partly at reversing the yield rise.

Commentators surprised at the euro’s resilience against the US dollar may be neglecting the extent to which bond prices have taken the strain of the crisis – the EMU-12 7-10 year bond price index has fallen by 7.9% since the early September yield low versus stability in same-maturity Treasuries (-0.1%).

Year to date, EMU bonds are down by 5.5%, representing – barring a late recovery – the worst annual performance since 1999, when 7-10 year Bunds plunged 9.6% as the newly-created ECB tightened policy at the tail-end of the technology boom.

A country-neutral QE operation – with purchases spread across national markets in proportion to GDP or population – would emphasise the monetary motivation and counter criticism of a backdoor fiscal bailout. A reasonable initial target would be buying of 5% of GDP over four months (i.e. equal to the current UK programme), implying a monthly rate of about €120 billion. For comparison, the ECB has purchased a cumulative €120 billion since its “securities markets programme” (SMP) was restarted in early August, equivalent to €35 billion per month.

Claims that such a policy would amount to inflationary money-printing should be met head on. The ECB is already conducting QE via its SMP and covered bond purchases – the SMP "sterilisation" operation involving auctioning one-week term deposits is entirely cosmetic since banks will regard such deposits as fungible with central bank reserves. More importantly, money-printing is necessary to head off deflation if the banking system is destroying deposits by accelerating deleveraging in response to sovereign bond losses and misguided regulatory pressure.