debtBank of Japan's decision to ease monetary policy further boosted sentiment on Wednesday causing the European markets to edge higher. Riskier currencies failed to benefit from the positive mood however, with EUR/USD extending its decline briefly below 1.3000 and the pound unable to break 1.6250.

Spanish 10-year bond yields decreased to 5.66%, despite the fact that it is still uncertain whether the country will officially request bailout. Vassili Serebriakov, Currency Strategist at Wells Fargo Bank, believes that “ESM/EFSF aid for Spanish is more likely than not.” He adds that “combined with a possible activation of the ECB bond purchase program, this implies scope for a further reduction in the European bond market risk premia.”

Several Eurozone countries suggest creating a European Monetary Fund

Germany, France, Italy and Spain are among the European countries which have jointly prepared a document in which they propose to establish a European Monetary Fund and urge EU Member States to give up some of their national sovereignty in order to increase solidarity in crisis situations.

The report, prepared by Germany, Austria, Belgium, Spain, France, Holland, Italy, Luxembourg, Poland and Portugal has been sent to the European Commission, the BCE, the Eurogroup and the European Council. According to the document, EU countries should cede some of the national sovereignty in exchange for greater aid in crisis situations.

The concessions would include giving EU institutions the power to supervise the national financial and budget policies, as well as ceding some autonomy to decide on economic policies related with the sustainability of the Eurozone's economic and employment growth.

In return, mechanisms of European solidarity would be improved, including with time the issue of Eurobonds. The document also specifies that in the medium term the European Stability Mechanism should move on to become a European Monetary Fund.

European stocks continue falling; Spain in the spotlight

European markets and the euro continued falling on Tuesday, as the situation in the Eurozone remains uncertain. Investors' attention is now focused on Spain, which hasn't submitted a formal request for EU bailout yet, despite being prompted to do so as soon as possible.

As Mike Meyer, Assistant Vice President at EverBank World Markets points out: “Yields on the Spanish 10 year bond did rise to as high as 6.01% and the similar Italian yield did rise to 5.11% at one point, both of which aren't in red line territory, but any sharp intraday increases do get investors anxious.”

The economist also reminds that in the Eurozone peripheral countries “there is growing public backlash over additional austerity measures, which includes raising the retirement age and changing some of the tax structure.”

Spanish borrowing costs fall at auction

The Spanish Treasury held a debt auction on Tuesday during which it managed to sell 4.6 billion euros worth of 12- and 18-month government bonds, out of a targeted 3.5-4.5 billion range.

The country sold 1.019 billion of 18-month T- Bills at an average yield of 3.072% (in comparison with 3.335% seen at the previous auction). It has also auctioned 3.557 billion of 12-month T-bills at an average yield of 2.835% (versus 3.07%).

The drop in Spanish yields was nevertheless widely expected and, as the Danske Bank team of analysts point out, “despite market pressure having decreased, Spain is likely to ask for a precautionary EFSF programme in the autumn.”

European markets fall on renewed debt crisis concerns

Following last week's post-QE3 rally, European markets dropped on Monday, as crisis woes intensified due to an uncertainty surrounding the situation in Spain, which still hasn't asked the EU for a bailout.

German Chancellor Angela Merkel held her annual press conference at the Bundestag in the European morning, during which she gave an overview of the current situation in Germany and commented on the recent developments in the European debt crisis.

The German leader opened the conference by urging EU officials to move towards “closer political co-ordination by the end of 2012,” stressing that it should be done without violating democratic legitimacy. She called for more efforts to reduce debt and deficits by implementing reforms which will boost growth and job creation.

Angela Merkel went on to defend Bundesbank head Jens Weidmann's persistent opposition towards ECB's bond-buying program, claiming that he aims at finding a "sustainable solution to the crisis”. The Chancellor emphasized that the ECB remains independent but it should not interfere in fiscal policy.

As far as Spain is concerned, Angela Merkel said that a “positive tendency” can already be noticed in the country’s economy. She also referred to Greece's problems and assured that EU officials are doing all they can to prepare reforms which will not bring more austerity but rather better organization.

EU banking union plan still a major sticking point

Over the weekend, EU finance ministers, gathering in Nicosia, Cyprus, hit another roadblock on the European Union’s plan for a banking union, a new single supervisor to watch over 6,000 banks in the eurozone.

Several aspects of the plan were not agreed upon, including the number of banks to be overseen and how to avoid marginalization in non-eurozone countries from key regulatory decisions.

As the Wall Street Journal reports, "a number of countries said that a proposed January 1, 2013, launch date left too little time to resolve key issues thrown up by the proposal." Those opposed for the supervisor's start date, according to the WSJ, "include the German, Swedish, Dutch and Danish ministers."

The Sunday Telegraph reports the German finance minister Wolfgang Schäuble arguing that it would "not be possible" for the ECB to assume its new role by early January 2013, time when authorities are expected the central bank to take on the new role. Berlin is also concerned, saying "it will take time to create the sizeable apparatus to do so" the Telegraph notes.