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Hope For Euro As Germany Softens Stance

(c) Sky News 2012

The G20 summit in Los Cabos was never going to be the grand breakthrough the euro crisis so desperately needs - but it has at least ended with a chink of light for the single currency.

According to insiders, the German Chancellor, Angela Merkel, has softened her stance on whether the euro area's two bailout funds, the EFSF (European Financial Stability Facility) and ESM (European Stability Mechanism), can be used to buy up government debt.

The shift is significant: although the the funds - certainly the ESM, which should be up and running next month - have the theoretical ability to do this, they haven't done so yet, in the face of German resistance.

And it matters for two reasons: first because it's those government bonds which are the epicentre of the crisis. 

Spain can't borrow at a cheap enough rate to sustain itself permanently; Italy isn't far off from that point either - so they could desperately do with someone going into the open market and buying their bonds.

Second, and most importantly in the long-run, this is one small step towards fiscal union - or could be.

If the EFSF is buying up other countries debt, funded by all of its members then, provided this is a genuine purchase, it amounts to a kind of debt mutualisation. Spanish-issued debt, in other words, is swapped for European-issued debt.

The problem, of course, is that the Europeans haven't yet shown any sign of taking this step - instead relying on the European Central Bank to buy some of the troubled bonds through its own scheme: a halfway house no one is particularly happy about.

What's significant here is that the Germans may be softening their tone on the idea, and there are hints here in Los Cabos that the funds could even buy some of those troubled government bonds in the coming weeks - although more will become clear on that front following next week's European summit.