France and Germany have been the European Union's core from its creation. But markets show a crack in the rock-solid Franco-German alliance.
The 10-year yield spread between French and German debt has tripled in recent weeks. At 67 basis points Monday, the gap is just a blip next to the 15 percentage-point premium that investors demand for Greek debt.
But any separation between the bloc's two largest economies shows the contagion is spreading to the heart of Europe.
The French-German yield has cooled since Aug. 8, when the European Central Bank began buying euro zone debt again. The ECB said Monday it bought 14.3 billion euros ($20.6 billion) in sovereign bonds last week after snapping up 22 billion euros worth in the prior week.
Those renewed debt buys have brought Italian and Spanish yields below 5% after they had topped 6%, nearing unsustainable levels that could force them to join much-smaller Greece, Ireland and Portugal in bailouts.
A rescue of the third and fourth largest euro zone economies would put an enormous strain on France, which has a relatively high debt-to-GDP ratio already.
Shares of French banks have tumbled as borrowing costs rise. They are heavily exposed to European debt. So a sovereign default or restructuring by a zone member would deal a significant impact on France's economy, which didn't grow at all in Q2.
Europe's debt woes have followed a pattern of spiking and spreading, interrupted by short-lived respites.
The relative calm of the past two weeks may soon pass as Eu rope's traditional August holiday ends when lawmakers get back to work and ordinary voters return to weaker economic outlooks.
European countries have yet to approve a July deal for a second Greek rescue and other crisis measures. Athens agreed last week to give Finland collateral in exchange for new loans. Some nations want similar bilateral accords; others say it's illegal. The collateral fight could derail the bailout and lead to default, Moody's warned Monday.
Analysts argue that the euro zone ultimately must have a much-deeper fiscal and political union to survive.
But Germans have no appetite for this. Domestic opposition to the idea of eurobonds, in which Germany would essentially co-sign debt of all 16 other euro zone members, continues to grow.
Eurobonds would create a "debt union," Finance Minister Wolfgang Schaeuble said Monday.
The Bundesbank said Europe's existing actions risk creating a "transfer union" in which Germany perpetually finances its spendthrift neighbors.
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