Officially Eurobonds are taboo but behind the scenes nothing has been ruled out
Almost exactly one year ago I wrote the following:
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.
The time for this idea has apparently arrived. Die Welt provides more confirmation of what I have seen in two different accounts, first in Austrian daily Der Standard and then on the Spanish website Cinco Dias: Eurobonds are a potential solution.
Translation from German:
The Bundesbank no longer rules out emission of common European bonds – so-called Eurobonds. Prerequisite, however, is closer financial integration for the euro countries. "This means joint control over the budgets of the member countries, including intervention rights if individual countries should violate the agreed rules," said Bundesbank President Jens Weidmann to the "Berliner Zeitung".
Whether Eurobonds would be introduced, would be a political decision. "You’d be well advised, however, to think about it only at the end of an integration process," said the Bundesbank chief.
In Brussels fear or hope is rife, depending on whom you ask, Merkel’s people driving policy or those who accuse Germany of blocking solutions. By the next European Council meeting, the Summit of Heads of State and Government at the end of the first week of December, the Chancellor could have negotiated a deal. Whereby their agreement could involve Eurobonds or a stronger commitment from the ECB in exchange for a promise from everyone in Europe to put their economies on a more sustainable path.
Merkel increasingly isolated
What makes it no easier for Merkel: she is increasingly alone. Yes, Sarkozy refrained from making a direct attack on ECB monetary policy while in Strasbourg, but he stressed the "different histories of both countries" in this question.
And the most loyal allies of Merkel are leaving the post. Dutch Finance Minister Jan Kees de Jager, also master of a healthy budget and a proud member of the club of Triple-A countries, wanted, before a meeting with Finnish Ministry colleague Jutta Urpilainen and German Finance Minister Wolfgang Schaeuble on Friday, not to rule out a more "active role" for the ECB.
"Where the ECB is concerned, our position is very close to the German or nearly the same," he said. But: "In a crisis nothing should be ruled out. In the end, something must happen." And Urpilainen stated in a newspaper interview: a bigger role for the ECB is still preferable to joint Eurobonds.
This article also speaks of German MPs in the European Parliament in favour of greater ECB engagement as well as José Manuel Barroso’s proposal for Eurobonds. Die Welt also writes that Merkel will propose a European treaty change to allow high deficit countries to be sued in the European Court of Justice. The foreign minister from Luxembourg Jean Asselborn warns against betting too much on treaty changes though. He believes that once you open up the Pandora’s box of treaty change, other changes would suddenly appear on the table as well – and the whole thing would get quite messy, especially with referenda necessary in both Ireland and France.
The Wall Street Journal is also reporting that the euro zone is considering bilateral agreements instead of treaty changes as a speedier way to get to fiscal integration. Afterwards, ECB intervention and/or Eurobonds should not be ruled out.
The formula here is:
- Cobble together some semi-credible form of fiscal integration quickly
- Only then back this up with ECB lender of last resort role or Eurobonds
It looks like things are breaking toward monetisation and/or Eurobonds. Expect to get one or the other after a fiscal agreement by 9 December.
The rationale for this jury-rigged way of approaching the crisis is to protect the existing principles laid out for Euroland which call for an independent central bank and fiscal discipline. See my underlining in the the relevant articles of the Lisbon Treaty for the sovereign debt crisis. Moreover, if this policy path holds, the ECB can say that it adhered to its principles despite acting in a quasi-fiscal manner. And politicians can go back to their voters and say they did so as well.
Source: Kulissen-Kampf um den Euro und die letzte rote Linie – Die Welt