A Euro sustainable bond

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As the euro crisis makes its latest twists and turns, both confusing and concerning all involved, the debate on whether Eurobonds could be part of the solution to the crisis also continues. Could they be the part of the prompt, effective and courageous decision that any solution to the crisis surely demands?

Over recent months, different solutions and strategies have been proposed. The ‘Tremonti/Juncker’ proposal envisaged a system of bonds issued by a European Debt Agency (EDA), in order to cover up to 40% of EU public debt. The proposal retained an element of moral hazard for indebted countries, and might not exclude a restructuring of the 60% of remaining debt.

This proposal followed on from the “Delpla/von Weizsäcker” project, which put forward an idea of two different bonds, aiming at containing public debt level under 60%. There was also a proposal from Romano Prodi and economist Alberto Quadrio Curzio, who suggested a ‘EuroUnionBond’, issued by a European Financial Fund (EFF), and acting as the pivot of a new system of European economic governance.

However, the current situation is so explosive – to use Sarkozy’s words – that adopting a Eurobond solution should be the first step of a strategy that then leads to a European common policy that goes beyond the merely fiscal. Emma Bonino is no longer isolated in calling for a federal approach (by creating the United States of Europe, a “light federation” that will pool a series of policies, with fiscal union and EU Treasury Ministry as its priorities). This debate on federalism has now firmly taken root. Eurobonds would be just one tile in the wider mosaic of a common EU government.

The first substantial obstacle to Eurobonds is their sustainability – they need to be endorsed from four different points of view: political, economic, legal and institutional. Without persuasive reassurances, the participation of Eurozone countries cannot be taken for granted.

The second obstacle is called Germany. In Berlin the ongoing debate among economists, former ministers, economic institutions and the current government is now shifting towards an examination of the costs, benefits, and consequences that may come out should the EU give the green light. Berlin is acutely aware of the central role it would play with Eurobonds, partly because Germany would be the most financially-exposed country. The challenge is to make sure that the Eurobonds did not become “junk bonds”[1]. But how?

From a political point of view, sustainability requires common ground between the decisions of EU institutions and national governments. The latter should act once they obtain electoral support; however, the defeats suffered by Chancellor Merkel’s coalition over the last two years do not make the whole process easier. Despite Berlin’s reasonable attempts to find a strategy to overcome the Eurozone crisis, the electorate focuses instead on benefits that undisciplined EU countries will receive.

 

Economic sustainability is usually targeted by capping the issue of Eurobonds at a particular level of public debt, for instance 40%. This might cause a solvency problem[2] for those states with a ratio public debt/GDP beyond the given rate. Economic sustainability is also helped by restoring market confidence. Investors would surely welcome the issue of Eurobonds if we see genuine Economic Monetary Union (EMU) that is backed by fiscal union, as suggested by our colleague Sebastian Dullien. This is certainly not an easy path to take, and negotiations may last years, but it would lead to stronger and more stable European bonds.

Uncertainty also spreads also from an institutional and legal point of view. Who would manage these new bonds? Any reinforcement of the European Commission’s monitoring powers need to be tightly regulated to avoid unnecessary interference in the sovereignty of member states. The Treaty on the Functioning of the European Union, could be partially revised, starting from the so-called no bail-out clause. As art. 125 states, “The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities” and also any kind of financial support, disguised as loan. Otherwise, as the appeal signed by George Soros and more than 100 prominent Europeans envisages, a new binding agreement could establish a common treasury, strengthen financial regulation and promote EU growth by creating a centralised system of control on Eurozone deposits. A review is certainly possible, but nobody has forgotten how difficult the approval of the Lisbon Treaty was. France and the Netherlands serve as a warning.

The Eurozone is waiting for somebody’s – Berlin’s – first move. Debate in Germany is more lively than ever. On the one hand, Angela Merkel’s current government sees Eurobonds as taboo. Finance Minister Schäuble, for instance, considers that Eurobond cannot work outside of a fiscal union[3]. Schäuble’s observation implies a choice between fiscal union or autarchy. In times of economic crisis, the costs and benefits of both scenarios have to be accurately weighed. Schäuble’s scepticism has been partly mitigated by his predecessor, Steinbrück: who opens the door to Eurobonds, provided that the European Union follows the International Monetary Fund’s model: “if a euro-zone country does not comply with the conditions set, then they get no euro-bonds”.[4]

Karlsrühe puts an end to the discussion: the German Federal Constitutional Court excludes any form of sovereignty handover in the scope of fiscal responsibility and stops any international mechanism that might replace Member States in key sectors like political economy.

Eurobonds certainly will not be set up quickly. The spread between supporters and opponents will first be inevitably reduced. In the words of President Barroso: “Once the Eurozone is able to assure integration and discipline, the emission of common bonds will come as a consequence, being an advantage for everyone”.

Integration and discipline as a new mantra for the Eurozone? Revising the Treaty in order to get rid of unanimity might be the right move to speed up the process. We cannot exclude a wider perspective, moving from economic reforms and heading to a common EU policy. However, in order to get such an outcome, member states should consider gradually ceding national sovereignty as an opportunity and a shield against future crises, rather than a deprivation.


[2] A debt restructuring could represent a possible exit  strategy

[3] “As long as we don’t collectivise financial policy we also cannot have a uniform interest rate level. The different rate levels are the incentive to run a solid economy or the punishment if you are not running it properly,” Finance Minister Schauble

[4] The Economist, Without the free lunch, 13 September 2011

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