At first sight, this looks mad. Lending to the UK government, in charge of the clapped-out British economy, now returns less than lending to Europe’s most successful country.  Worse still, the yields on gilts are measured in sterling, a chronically weak currency, so not only does your money earn less, you’ll be repaid in something which history says will have been devalued by the time you get it back. Oh, and by the way, inflation is 3% above the yield, making the internal devaluation painful, too.

Something is seriously awry here, and two events this week offer clues to why German government 10-year paper yields more than the equivalent UK stock. On Wednesday the markets were spooked by the failure of an auction of 10-year German debt. Those in this arcane world struggled to understand what it meant, so there’s little hope for the rest of us. It’s either bad news, or very bad news, probably depending on whether you’re short of German bonds.

Within minutes, confusion was worse confounded by a Barroso bomb. The latest wheeze from the president of the European Commission has a splendidly Titanic-like quality. As the good ship euro lists alarmingly in heavy seas, the captain’s contribution is a proposal to design another boat. Without conscious irony, the proposal is dubbed “stability bonds” – debt backed jointly and severally by all the member countries in the euro zone. These would require promises of fiscal continence from every government. Presumably the promises would be even more binding than the binding promises made by, say, Greece, when it joined the eurozone in the first place.

Captain Barroso seems not to have noticed how dire the position is. “It is important to show to public opinion and to international investors that we are serious about stronger governance in the euro area, both in discipline and in convergence,” he said, unveiling his latest wheeze. If only. His crew had been asking for a 5% spending rise. Discipline is for others, clearly.

He might as well have sung “I believe in miracles”, and the Germans were quick to knock him down, but the damage had been done. The combination of Barroso’s fantasy and the bund auction failure has caused investors to ask what exactly they are getting when they buy any euro-denominated paper.  UK gilts are obligations on the British government, which has the longest record in the world of meeting them, albeit in devalued pounds. The euro depends on a disparate collection of highly variable European countries, some of which are clearly in no state to honour any obligation.

It’s highly unlikely that the Bundesbank will fail to make payments when they fall due, but this week has exposed a qualitative difference between a true sovereign currency, and one designed by committee, held together by ideology and political sticking-plaster. This uncertainty has bred the euro discount, and the result is the bizarre spectacle of cheaper money for the UK government than for the Germans.

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