By Andrew Barber
On March 10 French President Nicolas Sarkozy, Luxembourg’s Prime Minister Jean-Claude Juncker, German Chancellor Angela Merkel and Greek Prime Minister George Papandreou signed a letter addressed to the European Commission demanding an investigation into the use of credit default swaps in sovereign debt and the role they have played in raising yields for bonds issued by more vulnerable Union members such as Greece and Spain. “We must prevent speculative actions from causing so much uncertainty on the market that prices no longer provide accurate information and state financing reaches a fundamentally unjustifiable high level,” they wrote.
This rush to blame bank and hedge fund traders for rising yields on sovereign debt is one-half scapegoating, one-half wishful thinking. EU politicians have found a convenient narrative that lets them gloss over both the lax...