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The European Stability Mechanism fund launches in October 2012.

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In a complete reversal of the situation in 2012 when Spain's and Italy's bond yields reached about 8%, Spain's 10 year government bond yields declined to 2.579% on June 8, 2014, according to Tradeweb. The ECB's efforts to fight deflation by injecting money into the financial system in 2014, and investor search for higher yields, is driving up the price of Spain's bonds and reducing yields below that of U.S. Treasurys for the first time. The period it took for this to happen- just 2 years!

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The Ifo Institute's Hans-Werner Sinn presents the German view on bailouts for Greece, Ireland, Portugal, Spain and Italy. He says that socializing of debt was proved to be a bad idea even in the U.S. experience when eight states and territories were allowed to go bankrupt in the 1830's and 1840's, and even though California is close to being bankrupt no one suggests socializing the debt. The European Economic Advisory Group has favored short term assistance and liquidity assistance but not aid for insolvency. Bundesbank assistance for international shift of refinancing credit, also called Target credit, is estimated at $874 billion, since 2007. Greece and Portugal current account deficits were financed using this. ECB purchase of government bonds $250 billion, and $500 billion in rescue programs from the IMF, and additional help from the European rescue funds such as EFSF. Sinn says Germany would lose $1.35 trillion if the euro fails. If Greece, Ireland, Italy, Portugal and Spain go bankrupt and repay nothing, and the euro survived, Germany would have lost $899 billion by his estimates. He responds to critics by saying that the Marshall Plan gave Germany 0.5% of GDP for 4 years, or 2% in total, or about $5 billion today if taken as 2% of Greek GDP....

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European Central Bank executive board member Benoit Coeure, says the ECB will act quickly on a program to buy government bonds, so as not to fall behind the curve in taking action. He said the ECB had a moral and legal responsibility to act, considering the low annualized inflation of 0.3% in November 2014. Analysts say this could come as early as Jan 22, at the next ECB meeting, because the meeting in March may be too late. Coeure pointed out that the design of the program will be made in the manner similiar to that of the Outright Monetary Transactions Program of 2012, so that broad consensus is achieved. The ECB's staff is currently working on this. The U.S. and Japan have implemented monetary easing programs with quantitative easing, and the ECB is now moving in this direction to increase growth and bring inflation to about 2%. The ECB also now plans to put out detailed policy minutes after each meeting. The euro is expected to weaken further below $1.24 with the announcement of the program....

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In an effort to calm unsettled global financial markets ECB president Mario Draghi said in a speech on July 26, 2012: "Within our mandate, the ECB is willing to do whatever it takes to preserve the euro and, believe me, it will be enough." Yields on Spain's government bonds reached 7.5% as investors shunned Spanish bonds fearing the need for a government bailout.

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Jorg Asmusen, member of the executive board of the European Central Bank, and Jens Weidmann, president of Germany's central bank, the Bundesbank, argue on opposite sides before the German Constitutional Court in Karlsruhe. Weidmann says the bond buying of sovereign bonds of Italy and Greece by the ECB is unconstitutional, Asmussen defends the ECB's plan to lower the borrowing costs for Italy and Spain in 2012. Both Asmussen and Weidmann are students of Manfred Neumann, professor of Economics at Bonn University. Neumann says such action is unconstitutional. The Federal Constitutional Court takes public opinion into account in its rulings.

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Germany's deputy finance minister, Jorg Asmussen, was nominated by the German government to the executive board of the ECB. This follows the resignation of Jurgen Stark. Asmussen was originally appointed by the previous finance minister, Peer Steinbruck, and is from the SPD party. He was retained by Finance Minister Schaeuble because he had experience with the global financial crisis of 2008. Both Asmussen and the new Bundesbank president, Jens Weidmann, are students of Axel Weber, who was a professor before becoming central banker.

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In remarks published in English on the Bundesbank website, Jens Weidmann, Bundesbank president and member of the ECB governing council said: "The ECB should be aware of its independence. This also requires it to respect, and not to overstep its own mandate." This is seen as a pushback by the Bundesbank to ECB president Draghi's comments on July 23, 2012, about doing all that is necessary to keep the eurozone together. Weidmann referring to the situation in France recollecting his days as a student in France in 1987, said there were "two different worldviews colliding." And that this situation prevailed in all political debates right up to the present day. He says about deflationary tendencies -"If these countries go through adjustment processes which result in decreases in wages and prices, then this constitutes one-off shifts in the wage and price structure and not deflation."

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Spain and Italy's 10 year government bonds yield declined to 3.2% in April 2014, compared to 2.68% on U.S. 10 year government bonds and 1.56% for German 10 year bonds. This is a far cry from the dark days of 2012 when these yields for Italy and Spain hovered at 7-8%. Italian bonds reached a peak in Nov. 2011 of 7.408% and yields declined to 3.221% on April 8, 2014, according to Tradeweb. Spain's bonds reached a peak of 7.637% in July 2012 and declined to 3.204% on April 8, 2014.

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A new generation of younger leaders takes over at the European Central Bank under Mario Draghi. Belgian economist Peter Praet succeeds Peter Stark of Germany in the Economics Department. Portugal's Vitor Constancio is vice president. Jorg Asmussen, 45, from Germany is on the ECB executive board, so is Benoit Coeure, 42, from France, and Klaas Knot, 44, from the Netherlands. Asmussen will head the ECB's International Division. Jens Weidmann,43, is the new head of the Bundesbank. The result experts say could be a reorientation of the ECB's outlook away from the rigid anti-inflation stance of Draghi's predecessor, Claude Trichet, and a willingness to try new approaches to help Europe tackle this recession.

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Italy's finance minister, Tremonti, met with Jiwei, chairman of the China Investment Corporation, China's sovereign wealth fund. Italy's is trying to persuade Chinese officials to authorize buying Italian government bonds. This would reduce pressures on Italy's borrowing rates in world financial markets.

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The June 28, 2012 EU deal is expected to increase the role of the European Central Bank in addressing the eurozone crisis with powers of banking regulation and supervision and direct capital aid to Spanish banks. Mario Draghi's experience with the Bank of Italy and in dealing with different Italian governments has prepared him for the difficult task of making sure governments in the eurozone make responsible decisions for eurozone finances.

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The ECB's Long Term Refinancing Operation is working as planned with the lowering of borrowing costs for Italy and Spain. Spanish government two year bond yields are down to 3.3% in January 2012 from a high of over 6%. Italian government two year bond yields have declined to 3.9% in Jan 2012 from a high of 7.8% in November 2011. Experts say the response is much more positive than the market was expecting. Morgan Stanley anaysts expect the banks to borrow extensively when the ECB makes new loans under this program in February 2012, which they estimate could reach 400 billion euros. Spanish banks are expected to borrow 15-45 billion euros to use for buying Spanish government debt, which would take up about half of the debt Spain needs to issue in 2012. For the banks the 3 year loans at 1% interest with flexible terms for collateral given to the ECB, offers a way to earn higher interest rates on sovereign government debt of their national governments.

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The London based think tank Open Europe says the exposure from Greece puts the ECB's balance sheet at risk. A small 4.25% drop in the value of the ECB's asset holdings could wipe out the whole capital base of the ECB, according to Open Europe. The ECB holds at present 75 billion euros of Portuguese, Greek and Irish bonds on its balance sheet. In the last 12 months the ECB has increased its capital base to 10 billion euros. The decision to buy Spanish and Italian bonds increases the risk. The ECB loses money if the borrowing bank goes bankrupt or the collateral of the borrowing bank loses value. During the negotiations for the eurozone debt deal in July 2011, the ECB obtained guarantees from eurozone governments for the collateral it holds from Greece. This increases the need for the European Financial Stability Facility to take on the role of buying bonds of troubled eurozone countries.