Thanks to drift towards fiscal union, Britain is now more creditworthy than Germany

Wow! It now costs more to insure German sovereign debt against default than that of the UK, not withstanding anarchy on London streets. As the graphic below, brought to my attention by Conservative Party researchers via Andrew Lillico, demonstrates, it has become more expensive to buy “credit default swaps” (CDS) for German debt than for British.

Now obviously CDS prices need to be treated with a certain degree of scepticism. The market is thin and not really representative of underlying credit risk. Though the spread has narrowed considerably over the past year, Germany can still raise money more cheaply than the UK.

Never the less, this is a powerfully symbolic moment.

Unfortunately, this is not a function of the UK becoming more creditworthy. It is because as the eurozone moves towards a eurobond and shared responsibility for sovereign debt, Germany is becoming less so. According to calculations circulating in the German press, an interest rate 1 percentage point higher than otherwise would cost the German taxpayer around £20bn annually, or approximately equivalent to the fiscal transfer that still takes place between West and East Germany. Do the Germans want to subsidise the rest of Europe to that degree. I don’t think so.

See this brilliant Otmar Issing commentary for the most powerful articulation I’ve yet seen of what may loosely be described as the German view. European Central Bank intervention may temporarily have succeeded in depressing Italian and Spanish bond yields, but the political debate on Europe’s now unmistakable drift to fiscal union has yet to be had. How long can even the mighty Germany maintain its triple A rating once it assumes responsibility for Italy’s debts? This is a crisis which is going to run and run.