A Politically Dangerous Proposal Europe Pressures Merkel to Accept Euro Bonds
Angela Merkel has been steadfastly opposed to euro bonds so far, but Germany's Nein no longer seems set in stone. French President Nicolas Sarkozy may have changed his mind too after the market turmoil last week. However, euro bonds present a serious domestic political risk for Merkel.
The introduction of euro bonds, government debt issued by the entire euro zone, may be the only remaining way to solve the euro debt crisis, say some government leaders and economists, and Chancellor Angela Merkel could come under pressure from French President Nicolas Sarkozy to drop her categoric opposition to them at the special meeting planned by the two in Paris on Tuesday.
Over the weekend, Italian Finance Minister Giulio Tremonti called for the introduction of such bonds, saying, "We wouldn't be where we are now if we had had euro bonds."
But they would also increase Germany's borrowing costs, because the interest rates on such debt would be higher than on German sovereign bonds. Estimates for the annual rise in German interest payments vary widely, from 10 billion ($14.3 billion) to just under 50 billion ($72 billion).
'No Unlimited Support'
In an interview with SPIEGEL published on Monday, German Finance Minister Wolfgang Schäuble signalled he would remain firm. "The following remains true: There is no collectivization of debt, and there is no unlimited support," he said.
Asked if he was opposed to euro bonds, he said: "I'm ruling out euro bonds for as long as member states pursue their own financial policies and we need differing interest rates (on sovereign debt) as a way to provide incentives and the possibility of sanctions, in order to enforce fiscal solidity. Without this solidity, the foundations for a common currency don't exist."
The pro-business Free Democratic Party (FDP), junior partner to Merkel's Christian Democrats, has ruled out the creation of euro bonds. Their leader, Economy Minister Philipp Rösler, reiterated his opposition to them in an interview in the Die Welt newspaper on Monday, saying they "lead to equal interest rates in the whole euro zone and thereby undermine the incentives for a solid budget and economic policy in the member states."
Is German Resistance Waning?
At present, the euro zone has no common fiscal policy. Every government issues its own bonds. Euro bonds would broaden part of public debt issuance to the entire euro zone. The interest rates on these bonds would be the same for all countries, and the crisis-hit nations would be able to obtain finance at far lower rates. Germany's borrowing costs, by contrast, would rise. In economic terms, euro bonds would herald the launch of a transfer union, a long term shift of resources from the bloc's richer countries to the poorer ones.
Transfer union is a dirty word in the center-right coalition. Members of Merkel's government have consistently promised that German taxpayers won't be left to foot the bill for the euro crisis. If Merkel were to sign up to euro bonds it would endanger her parliamentary majority.
Members of parliament from the coalition parties are already unhappy with reforms to the EU's bailout fund, which will be put to the vote in the German parliament after the summer recess. Horst Seehofer, the head of the Christian Social Union, the Bavarian sister party to Merkel's CDU, has said his party won't agree to a transfer union. "We as the CSU won't support it," he said.
But the most recent escalation of the crisis could lead previous opponents of euro bonds to change their minds. Last week the French debt market came under pressure following rumors that France may lose its top AAA rating.
The German Sunday newspaper Welt am Sonntag reported that resistance to euro bonds was starting to crumble in Berlin. It cited unnamed government officials as saying steps towards a transfer union were no longer being categorically ruled out. The strategy employed so far -- launching massive new bailout packages -- was hitting its limits, officials said, according to the paper.
Germany's opposition Social Democrats and Greens have both said they would support the introduction of euro bonds provided that certain conditions were attached to them, including a tighter control of nations' fiscal policies. Green Party leader Cem Özdemir said the volume of euro bonds should be limited to 60 percent of a nation's gross domestic product.
Euro Bonds Could Cost Germany 47 Billion -- Per Year
Economists are divided about the likely impact of a euro bonds. Kai Carstensen of the Ifo institute, a respected economic think tank, calculated that Germany would face a 2.3 percentage point rise in its interest rates on government debt -- meaning annual costs increase of around 47 billion.
Investor George Soros said in an interview with SPIEGEL published on Monday that for the euro zone to work, member states need to be able to refinance a large part of their debt at equal interest rates. "You need to establish fiscal rules that will ensure the solvency of every member," said Soros. "This should make the euro bond acceptable to German voters. Europe needs a fiscal authority that has not only financial but also political legitimacy."
At the same time, Soros added, high-debt countries may have to leave the euro zone. "Europe, the euro and the financial system could survive Greece leaving. It could survive Portugal leaving. And the remainder would be stronger and more easily managed," he said.