Otmar Issing: Germans Should Just Say No to Eurobonds
by Edward Harrison
Last week I mentioned Eurobonds, bonds issued at the supranational euro zone level, as a vehicle some are pushing as a longer-term solution to any liquidity problems in the periphery. The thinking is that a pan-euro zone debt instrument could be used as a release valve for liquidity issues, allowing the truly insolvent to restructure their state level debt if necessary, without creating contagion.
The problem with the Euro bond is that it introduces the possibility of free riding by ‘profligate’ governments who get cheap funding on the back of ‘prudent’ governments. Many German policy makers are not interested in the Euro bond for just this reason. There is great resistance to European federalism. Otmar Issing, former ECB chief economist explains to Bloomberg’s Mark Barton in the video below he believes fiscal prudence is the only answer.
This shows that the chief issues affecting the EZ are asymmetry among the parties and disaffection with federalism. Until these issues are overcome, the EZ is not going to meet the standards of an effective monetary union.
The EZ did not meet the conditions generally recognized for an optimum currency area. It was assumed that creating the euro would lead to an OCA as a force majeure, or maybe deus ex machina. Was this wagging the dog’s tail? The GFC is the first test of whether it is possible to have an enduring monetary union without a real political union.
The capital has to come from somewhere, and now it is the NCB’s, which is, under current conditions, Germany. No wonder Germany doesn’t like the arrangement, but at least it has veto power now by refusing to provide capital. It is not likely to give that up. If Germany was wont, it could just provide the capital under the present arrangement ad hoc. Other arrangements aren’t going to make a difference if countries still have a veto. Eurobonds don’t really do anything without a corresponding federal (supranational) fiscal authority tantamount to a Pan-European government. We aren’t there yet.
During this crisis, we have seen massive excess, unserviceable private sector debt transferred to sovereigns with no consequences for debt holders. Many of these sovereigns were already excessively indebted themselves prior to absorbing this additional burden from the private sector. We now see many of these sovereigns faltering under the burden of this debt load. Not to fear, the super-sovereigns, like the Fed, the IMF, and the ECB, are now bailing out the sovereigns, again with no consequences for debt holders. Hence, the process is essentially one of transferring intact debt up the food chain to a level where it can be liquidated via monetization. My questions:
1. How long can this continue?
2. Has debt successfully been rendered inconsequential?
3. Would it not be so much more efficient to just have those who originate debt in the first place submit their burdens directly to a central bank for monetization, rather than go through such a convoluted process? (Tongue-in-cheek question)
To answer my own questions, the super-sovereign Ponzi will have legs until the debt burdens of the larger sovereigns, like France, Italy, Spain, UK, USA, and Japan are recognized as being unsustainable. This is clearly already true, the question is when does it receive market acknowledgement? Alternatively, it will end when the sheeple of this post-democratic age forcefully refuse to allow their leaders to obligate national treasures to make every rich debt holder entirely whole. It will end when the illusion that some nations never default is debunked, and a proper risk premium is restored to debt at all levels. I feel that this absence of proper risk premium, inferred from the sovereign, has led to some of the worst distortions market have experienced, to include TBTF, FNM/FRE, etc.