Alternatives to the eurobonds scheme | Business| Economy and finance news from a German perspective | DW | 23.05.2012
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Alternatives to the eurobonds scheme

Italy and France are trying to breathe new life into the old eurobonds proposal. German Chancellor Angela Merkel is saying 'no,' although she seems to have forgotten another idea that's been simmering on the backburner.

deflated euro balloon

deflated euro balloon

The debate is as old as the euro crisis: should a union that uses a common currency also issue common bonds? But the problem continues to be that these debts taken out would belong to all 17 eurozone nations.

One of the most vehement proponents of the idea was Italy's former Economy Minister Giulio Tremonti - who was shot down by the German finance minister at that time, Peer Steinbrück. It was 2009, and the euro was giddily celebrating its first decade.

Back in those heady times, Tremonti's eurobonds didn't have a chance.

German Finance Minister Wolfgang Schäuble

German Finance Minister Schäuble is no fan of eurobonds

But the idea has once again resurfaced and seems to be adding new fuel to the fire. Not just Italy, now France as well wants to use these bonds to reduce refinancing costs. Germany's interest rates for consolidating such bonds would certainly rise as a result.

Earlier this week, the Organization for Economic Cooperation and Development (OECD) threw its support behind recently elected French President Francois Hollande, who is promoting a growth package.

Bad idea

As a short-term measure to promote growth across the European Union, the OECD is specifically proposing issuance of commonly secured government bonds in order to support recapitalization of the banking sector and secure better credit availability.

The OECD's new economic outlook favors using eurobonds to further develop the eurozone by strengthening private sector trust. But strict budgetary discipline and successful consolidation would be vital for such measures.

A bad idea, say members of the euro area that are still able to borrow fresh money at cheap interest rates on the capital market. And this includes more nations than just Germany. Austrian Finance Minister Maria Fekter has also spoken out on this issue.

"I cannot grasp the concept that Austria should pay possibly twice as much than we already pay in interest," Fekter said in Vienna. As long as the budgets of euro nations aren't balanced and stabilization has not been achieved, she said, "I will not jeopardize Austrian solvency."

Austria's Minister of Finance Maria Theresia Fekter talking with Luxembourg's Prime Minister Jean-Claude Juncker (left) before the Ecofin Finance Ministers meeting in Copenhagen, March 2012.

Fekter 'cannot grasp' the benefits of eurobonds for Austria

Budget expert Otto Frick of the German Free Democratic Party sees eurobonds as "plainly unconstitutional." Germany would take on liability from indebted states all over Europe, especially from nations in the throes of crisis.

This would increase yearly interest expenditures for Germany by at least 15 billion euros ($19 billion), causing Europe to sink further into the debt swamp, Frick said.

German council's solution

An argument that's been used against the eurobonds scheme is the so-called "moral hazard." This line of thought argues that attractive interest rates would simply incentivize peripheral countries into further inefficiency.

Playing off this concept, Alexander Graf Lambsdorff, a German Free Democrat (FDP) member of the European Parliament, described eurobonds as "comprehensive insurance without a deductible."

Alexander Graf Lambsdorff in front of euro flag

Lambsdorff: 'comprehensive insurance without deductible'

Eurobonds proponents gladly point out that the German Council of Economic Experts considered looking at such bonds in its annual development plan. The council, also known as the "five wise men," last fall introduced a debt repayment fund that included community liability.

The German council's model differs substantially from the eurobonds idea. It incorporates the advantages of eurobonds - that is, reduced interest rates for weakened euro countries - but includes safeguards that require nations looking to take advantage of the cheap financing to also implement strict consolidation and reform courses.

Author: Rolf Wenkel / sad
Editor: Gabriel Borrud

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