Pressure now on Germany for Eurobonds
Spiegel is reporting that European Commission President Jose Manuel Barroso plans to talk up Eurobonds on Wednesday and to present three different options for issuing Eurobonds as a solution to the European sovereign debt crisis (hat tip Kevin). This is an idea to which the Germans have been resistant, but according to Spiegel, Chancellor Merkel is under pressure to consider this option given her proposal to move to a tighter fiscal union.
The Eurobond option has been around for some time. In November of last year how Eurobonds are a potential facet of European sovereign debt monetisation. If the Germans agreed to Eurobonds, they could be used to swap existed debt for the new jointly and severally liable euro zone debt as I discussed last year.
Euro bonds would be a supranational debt instrument backed by the collective taxing authority of euro zone sovereign governments. As such, it would represent a blended debt structure on the same ‘level’ as the ECB more akin to what we see in other sovereign countries like the UK, the US or Canada.
In practice, you could have sovereigns conduct a ‘sovereign debt swap’ whereby the ECB buys an agreed-upon portion of the existing debt from the sovereigns and then uses these funds to back the supranational debt. In future, the same agreed upon percentage of debt would be issued at the supranational level. Clearly, you have to have all euro zone members commit in equal measure or the benefits would not accrue to the periphery.
I reckon a proposal of this sort would be controversial. One should consider this a form of quantitative easing. This is the sort of structure which could only be set up over time – and may require amendments to existing treaties. Moreover, it should be viewed as a move toward the United States of Europe. I have said previously that the Germans would rather defect than allow this. So it will not be considered a legitimate political option until all other more superficial remedies have failed.
I think we are now at the point where desperation has kicked in. The superficial remedies of extend and pretend have failed with yields in both Spain and Italy rising. But, the Germans are at loggerheads with even the French on the ECB route. Some people are looking at an IMF-funded rescue. With Merkel talking up treaty changes, now the Eurobond proposal is in play once again.
Will the Germans go for it, though? Well, think back to early 2010. The same issues were under discussion but it was only Greece up for negotiation. Now contagion has spread the sovereign debt cancer. Back then I said the Germans will not bail out Greece. I was wrong, of course. They did bail out the Greeks and it is that policy to protect their banks and to extend and pretend which has led directly to the contagion and this entire mess.
Had the Germans actually taken the bitter pill back then, recapped the banks and moved to fiscal integration, we probably wouldn’t be here. So, my point here is that extend and pretend is a failed strategy that has created more problems and has not alleviated the fundamental problem of bank undercapitalisation and sovereign indebtedness.
So, here we are debating the same issues. Back in May 2010 I wrote “some brief thoughts on the Eurobond non-starter”, in effect saying the Germans would rather end the euro than go with Eurobonds. But, the Germans blinked on the bailouts again and again. So I think it’s reasonable to think they could blink here too. Stay tuned.
Source: Merkel Under Pressure to Say ‘Ja’ to Euro Bonds – Spiegel