11 August 2011

Bloomberg: EU heads for eurobond clash over fiscal union

Thomas Mayer, chief economist at Deutsche Bank AG, and Stephen King, chief economist at HSBC Holdings Plc, talk about the global economy and the eurozone debt crisis, as well as the question of “eurobonds” or “fiscal union” -- toxic language in northern countries such as Germany.

European ratification of a reinforced crisis-management fund will act as a prelude to an even more divisive debate: whether to put more money into the pool and use it to borrow on behalf of all 17 euro states.

The question of “eurobonds” or “fiscal union” -- toxic language in northern countries like Germany -- will force itself onto the agenda once the retooled rescue fund is in place as soon as next month. The trigger will be a European Commission feasibility study of jointly sold eurobonds, seen by a growing number of economists as the only way of guaranteeing to the markets that countries such as Italy won’t go bust. Unprecedented bailouts by governments and the European Central Bank have so far failed to stamp out the crisis that is menacing the region’s core members.

“Only Germany can reverse the dynamic of a European decay”, billionaire investor George Soros wrote in today’s Handelsblatt, the Düsseldorf-based newspaper. “Germany and other countries with an AAA rating have to approve some sort of eurobond regime. Otherwise, the euro will implode.”

A raucous parliamentary exchange is shaping up in Germany, already dragged by the debt crisis into an unforeseen role as the euro zone’s guarantor after assenting to the EFSF in 2010. German Chancellor Angela Merkel and French President Nicolas Sarkozy, who meet in Paris on August 16, have an end-of-September ratification target to enable the EFSF to relieve the ECB of the bond-purchasing job. Along with September’s planned enactment of laws to strengthen Europe’s deficit-limitation rules and monitor economic imbalances, the EFSF upgrade will touch off a fracas Merkel has sought to avoid.

“Iron Chancellor Opposes Eurobonds”, German newspaper, Die Welt, headlined last December when Merkel blunted earlier talk of the idea. Eurobonds are “taboo, damaging, undesired”, Norbert Barthle, budget-policy spokesman for her Christian Democratic bloc in parliament, told Bloomberg News on August 5.  A switch to shared borrowing would push up German funding costs by 1.22 percentage points -- German 10-year yields are about 2.3 per cent -- adding €25 billion a year to Germany’s interest bill, Kai Carstensen of the Ifo Institute in Munich told the Frankfurter Allgemeine Zeitung on July 19. 

Stabilise the system

The best-known joint-issuance proposal is the so-called blue-red model, drafted by researchers at the Brussels-based Bruegel institute. It foresees the 17 euro users selling common bonds to cover debt up to 60 per cent of each country’s gross domestic product, the level deemed “sustainable” by the euro’s founding treaty.

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