The European Central Bank's move to buy Italian and Spanish bonds to tame the region's debt crisis marks a step towards the kind of fiscal union Germany has opposed since the founding of the single currency.

While investors and economists say tighter fiscal ties and increased transfers to the financially weak euro states will be needed to end the financial contagion, the purchases of Italian and Spanish debt that Royal Bank of Scotland Group estimates may eventually reach €850 billion ($1.5 billion) threaten fresh political faultlines.

"This huge risk-pooling exercise will not come easily and the risk of political fallout will be large," said Jacques Cailloux, chief European economist at RBS. "This might be the necessary and painful step required to pave the way for the creation of a common debt instrument; the quid pro quo might be the loss of fiscal sovereignty."

The unwillingness of euro leaders to forge a United States-style federal fiscal union with the monetary union that now joins 17 states has been a handicap that has fuelled economic imbalances in the region, analysts and investors including billionaire George Soros have said.


Germany, the biggest euro economy, has long resisted such a set-up, saying it would discourage member states from enforcing budgetary rigour.

"We don't need a fiscal union and we should oppose it because that would mark a dissolution of responsibilities," said Michael Meister, the finance spokesman for Chancellor Angela Merkel's Christian Democrats.

"You can argue that markets in a sense are pushing towards fiscal integration," said Fabio Fois, economist at Barclays Capital in London.

"It's really, really still a long way off."

The outcome of Europe's crisis-fighting effort may determine whether the euro evolves or runs aground on the concern that its members are too diverse to be united in one currency if some aren't willing to abide by the rules and others won't aid those in trouble.

- Bloomberg