On Eurobonds and Italian default

There were a lot of rumours flying around in the German press this past weekend. The two themes that were most prevalent were Eurobonds and a potential sovereign default by Italy. I linked out to the most interesting pieces in the morning links. But I will provide some basic commentary here and translation of a couple of articles from a leading German publication,Welt am Sonntag.

On Eurobonds and Transfer Unions

Yesterday, I already highlighted an article from “Die Welt” called “Deutschland wird zum Zahlmeister Europas”. I wrote that “despite official denials by top politicians from the ruling coalition government, euro bonds are indeed being considered as an option to save the single currency.” Now, I have heard the official denials and the FT has reported that eurobonds are not going to happen. Nevertheless, I do believe Die Welt’s account is credible.

Another Die Welt article, Europas letzter Schritt in die Transferunion, gets down to brass tacks. The term Transferunion is code for a currency union in which profligate southern European nations freeload off of Germans and other hardworking Euroland nations. From an economic nationalism perspective, I would put it on par with the term “Anglo-Saxon” which in the German media almost always means the destructive and wild west-style capitalism which lines the pockets of elites in the US and the UK. I am intentionally using harsh terminology because these are the emotional issues behind these terms.

Here’s what the article says:

Measured [by transfers between Germany’s own states], the euro zone is certainly no transfer union, despite all the aid to Greece & Co. But it is on the way there. This, although nobody in Germany wanted a standard of living harmonisation at the European level. The Germans were even promised up and down that there will be no such thing. Otherwise, parting with the D-mark would certainly never have been possible.

Now things are different and the underlying reason for this is a whole series of decisions that in isolation are well-meant. But in combination, they have left a damning impression: the impression that Germany will do anything to save the euro – would break every rule or pay any sum. In this way, the largest country of the currency area always draws the short straw: the partner countries are aware that every German government gives in in the end.

The "Welt am Sonntag" traces the long journey to the transfer union.

The article goes on to demonstrate how each step along the way has led Euroland and Germany to this point. Obviously Eurobonds are seen as the culmination of this process. Notice that the subtext of the article is that the whole process has been incredibly undemocratic – and this has alienated the German electorate.

On default by Italy

In the article yesterday on Eurobonds I showed you a graphic in which Italy had the third highest sovereign debt to GDP ratio in the developed world behind Greece and Japan. It has had no growth for a decade and has a debt-to-GDP ratio over 130%. This is why many people are saying that Italy is insolvent.

In Die Welt, an interview with Barry Eichengreen is prefaced as follows:

The U.S. star economist Barry Eichengreen recommends abandoning Italy if reforms fail. He is worried about even the banks in Germany.

In reality, he stresses providing liquidity:

Therefore the European Central Bank should continue to support Italy. Italy has enough liquidity to hold out until the end of the year without assistance. However, the ECB should stand ready to continue but to buy Italian government bonds.

I think this goes to the point I made earlier about the transfer union and fiscal profligacy. See my German-framed post “How Belgian debt, Italian anarchy and Greek profligacy lead to economic chaos in Europe” for the fuller picture.

The bottom line is this: many in Northern Europe see this crisis as the result of the fiscal profligacy of bad actors which were known before the Euro’s existence to be bad actors. All of these countries except Spain have been running huge deficits throughout the last decade. In my view, Edward Hugh makes the right macro assessment – Italy is the elephant in the euro room, not Spain – and asks the right question: Can Italy Grow Its Way Out of Debt? If it can’t and there are no eurobonds, eventually Italy will default and the euro will be finished.

I’ll leave it there. I wish I had a positive spin for this one. Unfortunately I don’t.

Also see these German-language articles from yesterday:

  1. john haskell says

    You state that “All of these countries except Spain have been running huge deficits throughout the last decade” and support it with a chart that shows Italian budget deficits varying between 0.7% and 3.5% of GDP over the past decade, and averaging about 2% of GDP for that period. Is a 2% of GDP deficit “huge”?

    It seems to me that it would be correct to characterize Italy as having entered the Eurozone with a very large government debt, but not to say that Italy’s public finances have obviously and hugely deteriorated since then.

    Italy has an obvious competitiveness problem (according to the Economist, only Zimbabwe and Haiti have had worse GDP growth over the past decade) and they are now trying to catch up to Germany by hitting the brakes. That, and not having their own currency, are what will eventually cause them to default- unless the ECB is willing to buy E22 billion of their debt each week.

    1. Edward Harrison says


      Italy does have a primary surplus. In Italy’s case, the deficits probably aren’t ‘HUGE’. That’s hyperbole on my part and a bit over the top. But they are unsustainable given the growth trajectory for Italy.

  2. David Lazarus says

    I am glad that I am not alone in seeing problems in German and Belgian banks. I would put the chances of an Italian default around 50% right now. It can be avoided but fear the solutions will not be taken up. Though wiping out this debt in a default might be good for Italy. Though since it would devastate personal finances of many italians it might be problematic.

  3. Dave Holden says

    Thanks for the translations – it useful to get the German perspective.

Comments are closed.

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