Euro Bonds Debate: German Resistance to Pooling Debt May Be Shrinking

Never say never: The German government remains officially opposed to controversial euro bonds. Behind the scenes, however, press reports indicate that some within Chancellor Merkel's government have begun discussing the conditions under which they might accept a pooling of euro-zone debt.

German Chancellor Angela Merkel is still calling euro bond proposals "extraordinarily distressing" and "inappropriate." But how firm does her resistance remain? Zoom
dapd

German Chancellor Angela Merkel is still calling euro bond proposals "extraordinarily distressing" and "inappropriate." But how firm does her resistance remain?

Resistance to calls for the introduction of euro bonds appears to be crumbling ever so slightly within the parliamentary groups of German Chancellor Angela Merkel's government, leaving the door open that Berlin may yet shift its position on the highly divisive issue.

Only a day ago, Merkel had described as "extraordinarily distressing" and "inappropriate" a call by the European Commission, the European Union's executive, to introduce so-called " stability bonds." But with pressure mounting across Europe for a strong response to the euro crisis through the introduction of the bonds, newspaper reports in Germany on Thursday indicate that some within the chancellor's Christian Democratic Union (CDU) party -- as well as other conservative lawmakers with the Christian Social Union (CSU), the CDU's Bavarian sister party -- might be willing to give up their objections if certain conditions were met.

Citing conservative parliamentarians, the mass-circulation tabloid Bild reported that scenarios are currently being discussed that could lead to a German agreement on euro bonds. The sources said Berlin may be forced to accept euro bonds in exchange for other European Union countries accepting Berlin's demands for a tightening of the provisions of the euro stability pact.

The Financial Times Deutschland newspaper is also reporting that resistance to euro bonds is diminishing. "We never say never. We only say: No euro bonds under the existing conditions," Norbert Barthle, the budget policy spokesman for the parliamentary group of the CDU and its Bavarian sister party, the Christian Social Union, told the newspaper.

The newspaper also noted that Merkel's criticism of European Commission President José Manuel Barroso's plan had been aimed at the timing of his proposal. Merkel said during a budget debate of the German parliament that the pre-condition would be a change to the EU treaties as well as the introduction of a strict austerity regime.

According to the newspaper, the European Central Bank has also made its first fundamentally positive statement about the prospect of euro bonds. "Even if they are clearly seen as an unrealistic prospect, euro bonds, from the pure perspective of the international monetary system, would be useful as a reserve asset for the world economy," ECB deputy chief Vitor Constancio said on Wednesday.

Barroso Is the 'Mercenary of Dolce Vita Countries'

So far, German conservatives and their junior coalition partner, the business-friendly Free Democratic Party (FDP), have strictly rejected the introduction of euro bonds. And many heavyweights in the parties still oppose them. Bild quotes CSU General Secretary Alexander Dobrindt heavily criticizing European Commission President José Manuel Barroso's proposal to introduce euro bonds. "Barroso has made himself the mercenary of Dolce Vita countries who want to get access to our tax money quickly," he told the paper. He said Barroso's proposal to spread the burden for individual countries' debts across the euro zone is an affront to Germans.

Industry and business leaders have also come out critically against the euro-bond plans. Hans-Peter Keitel, president of the Federation of German Industries (BDI), a powerful business lobby association, told the Rheinische Post newspaper he hoped very much "that Ms. Merkel will stick to her position" and resist demands for euro bonds.

Outside of her comments in parliament on Wednesday, Merkel is saying little about the issue. She plans to meet in Strasbourg, France, for lunch with French President Nicolas Sarkozy and new Italian Prime Minister Mario Monti on Thursday to discuss the euro-zone crisis. The controversial euro bonds will be at the top of the agenda.

Many other euro-zone countries have already spoken out in favor of common bond issues, though France has yet to establish a clear position. The bonds are aimed at ending the distrust that most investors currently harbor towards the euro zone. Currently, countries like Italy and Spain are having an increasingly difficult time raising fresh capital on the markets at affordable interest rates. Risk premiums on French government bonds have also risen markedly in recent days.

German Bond Float Stalls

An additional shock hit financial markets on Wednesday after Germany, widely considered a safe harbor in the euro crisis, failed to find enough buyers for an auction on 10-year government bonds, known as Bunds. Analysts described the development as a warning signal, showing that the crisis now needs to be solved as quickly as possible.

Even if Merkel were to relent only in part in the dispute with the rest of the euro zone, it would likely give her stronger standing in terms of pushing through her ideas for future European stability policies. Merkel and her Finance Minister Wolfgang Schäuble (CDU) want to change the EU treaties in order to be able to implement stiffer penalties for perpetual violators of stability pact deficit rules. "We need rules for a common finance policy that will be observed by member countries and, if need be, enforced," Schäuble told public broadcaster ZDF in an interview on Wednesday night. "That's why we need a treaty change, so that we are no longer reliant on promises."

Schäuble is also calling for the introduction of a so-called "debt brake," or balanced budget law, in countries all across the EU. He said all member states would have to obligate themselves to the agreement, "and if the budgets fail to meet those requirements, then the European Commission needs to be in the position to be able to reject it."

The pressure for the German government to act is growing. On Wednesday, EU Economic and Monetary Affairs Commissioner Olli Rehn urged the bloc to move quickly to fight the debt crisis, stating the the situation in financial markets is "getting worse by the day."

dsl -- with wires

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1. Stability Bonds should be a distant destination not an immediate solution
alfredmifsud 11/24/2011
Realism please!! Whilst Stability Bonds could be a practical final destination to a comprehensive solution package it cannot be considered as an instant solution to the current crisis. Before Stability bonds can be adopted the following situation would have to prevail: 1. The Debt levels of all participating countries have to fall within 85% of GDP and heading steadily towards the 60% Masstrict target. This may have to involve debt writeoffs for over indebted countries of which Greece is the primest example. 2. Competiveness has to be re-established through the whole Eurozone as there is no longevity in a monetary union between countries with substantial different efficiency levels. This may have to involve the temporary exit from the Euro of the strong countries to reflect their superior efficiency in a hardened exchange rate and re-merging into Euro version 2 under different architecture. 3. The Eurobonds or Stability Bonds have to cover only debts up to 50% of the GDP to allow space for corrective measures before the 60% strict limit is reached. 4. As part of the new Euro architecture no country member would be allowed to borrow directly or indirectly from the market without the prior approval of its budget from a central budget authority. Members countries can retain some autonomy in fiscal policy but not on borrowing levels as such borrowing becomes the explicity or implicitly a common responsibility. This is a long term plan which cannot solve the current crisis. For the current crisis the only solution is in the hands of the ECB through the Euro equivalent of monetary easing and the creation of a mega fund for recapitalisation of Euro banks that would need capital to restore their capital ratios once government bonds are marked to market. If this involves wipeing out of private shareholders and some investors in deepely deferred bank bonds, than so be it. The EU taxpayer has to be rewarded for this salvage risk taken by the ECB until it can re-privatise the Banks once they are sanitised. If this is applied the current funding of the EFSF is superfluous and should be abondoned so as to protect the credit rating of participating countries. The EFSF should be the arm of the ECB to implement these measures if a comprehensive package including the distant destination of Stability Bonds can be agreed.
2. Let'shope they reconsider
msoelling 11/24/2011
---Quote (Originally by sysop)--- Never say never: The German government remains officially opposed to controversial euro bonds. Behind the scenes, however, press reports indicate that*some within Chancellor Merkel's government*have begun*discussing the conditions under which they might accept a pooling of euro-zone debt. http://www.spiegel.de/international/business/0,1518,799692,00.html ---End Quote--- It's time to be very clear minded - short term / long term - where these possible decisions will lead. Short term containing the eurocrisis is paramount but in the rush to do so it's important to realise that the path chosen will have dire consequences for the future of Europe. A "central financial government of Europe" and "eurobonds" is bound to split Europe in two - north / south. From a Danish point of view the problem is not really how to save financially Greece or even Italy or Spain - it's how to regain competitiveness with China, India,Eastern Europe. Even if the EU is split in two the "free trade zone" will probably not disappear -it's in everybody's interest to keep it so the direct cost of dismantling EU for countries that have not joined the euro is not that big - except of course the political honour that has to be swallowed. But given the size of decisions referendums will fix that.
3. Re: Euro Bonds Debate: German Resistance to Pooling Debt May Be Shrinking
brawdys@yahoo.com 11/26/2011
The lessons from the gold standard period are very clear. It is true that printing too much money exacerbates inflation. However, printing too little causes frequent financial crises as investors fear deflation and default. Financial crises were a frequent feature of the gold standard period. Currently forward inflation expectations in Germany are very low, 1%, a level consistent with high risk of deflation. Under the gold standard the only way to resolve balance of payments imbalances was devaluation. replace gold standard with the Euro. Spain has a lower debt-GDP ratio than Germany and 20% unemployment - there is no legitimate reason for high yields except lack of growth. The tolerance for more austerity and deflation is limited and dissapearing. The real lesson that needs to be learned, quickly, it what happens when money is too tight. Either the ECB opens up the spigot either with a higher inflation target and/or buying debt of the soveriegns, or the ensuing financial crisis will destroy the Euro and with it Germany's credibility as a partner. More austerity and fiscal discipline will not save the Euro. It has not protected it so far. Just look across the pond - balanced budget amendments did not save the U.S. states from high deficits and debt burdens when the economy collapsed. jointly-issued Euro bonds will not save the Euro either. The real issue is unbalanced growth in the Euro zone and credit destruction/deleveraging. Structural reforms may smooth the process, but fundamentally, too-tight money is destroying credit. The ensuing financial catastrophe will not only destroy the Euro, but with it German credibility, the German export machine and economy, and take a few German banks with it. Its very sad that it seems Merkel's party has learned all the wrong lessons from the 1930s. Merkel will be to German history what president Herbert Hoover is to the U.S. history: a leader who did all the wrong things at the wrong time and exacerbated the Great Depression.
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