Support grows for European Redemption Pact | Business| Economy and finance news from a German perspective | DW | 27.08.2012
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Support grows for European Redemption Pact

As the eurozone is laboring under the debt crisis in its Southern periphery, German economists have proposed a debt redemption fund to stabilize the current situation. But Berlin has not yet warmed to the idea.

In the current debate about solutions to the eurozone debt crisis, proposals focus more on longer-term, preventative measures rather than on concrete, short-term steps to lead the 17-nation currency area out of its current impasse.

Some urge the European Central Bank (ECB) to act as a lender of last resort, providing debt-stricken eurozone members with unlimited financing to stave off bankruptcy.

However, direct state financing by the ECB would by a "deadly sin," warned Wolfgang Franz, the head of the German Council of Economic Experts - a panel known as the Five Wise Men and advising the government on economic affairs.

Other proposals such as boosting the fire power of the eurozone rescue fund EFSF and its planned successor, the European Stability Mechanism (ESM), were no solution either, he said.

The same would go for so-called Eurobonds, which refer to a collective debt scheme guaranteed by all eurozone member states. But German Chancellor Angela Merkel vehemently opposes Eurobonds. She has said that she would never agree in her life to such a plan.

Eurobonds light

The members of the German Council of Economic Experts (dapd)

The economic experts council remains convinced of its proposal

Last November, Wolfgang Franz and the other economists on the panel came up with a plan, similar to the Eurobond idea of debt shared by all euro members.

Dubbed the European Redemption Pact, it covers all public debts of eurozone members above the Maastricht limit of 60 percent of Gross Domestic Product (GDP).

Estimated to hold excess debt of about 2.3 trillion euros ($2.88 trillion), the pact or fund would pay down the debt over twenty years by issuing new bonds.

Each country would be responsible for its own share of the debt in the fund - e.g. Italy 950 billion euros, Germany 580 billion euros, France 500 billion euros - but bonds would be issued jointly.

Breathing room

The beauty of the proposal is that it would considerably lower borrowing costs for debt-laden countries such as Italy and Spain, which currently need to pay interest of between six to seven percent for refinancing their sovereign debt.

However, Germany and other eurozone countries with better credit ratings would suffer as interest rates for the bonds issued by the fund would be higher for them.

The Redemption Pact is intended to give heavily indebted countries more breathing room, enabling them to initiate structural reforms while lowering the interest burden on their national budgets.

Growing support

The debt redemption plan is eagerly anticipated by the crisis-hit eurozone members, and enjoys the backing of France, the International Monetary Fund (IMF), as well as Germany's opposition parties.

However, German Chancellor Angela Merkel is still reluctant to sign up to the pact, arguing it would breach European Union treaties, especially a clause interpreted to preclude bail-outs in which countries are directed not to take responsibility for the liabilities of another country.

Jens Weidmann (dapd)

Weidmann is sceptical about eurozone debt sharing

In addition, Merkel may find it difficult to persuade her own conservative Christian Democrats to support the pact.

More fundamental criticism of joint eurozone debt redemption has recently come from German central bank head Jens Weidmann.

Weidmann said he feared shared eurozone liability would be introduced without effective control. And any venture into collective guarantees over debts, he demanded, should only be made with tough conditionality attached to it.


In the opinion of the German central bank chief, conditionality first of all means relinquishing national sovereignty over fiscal policy - a notion still vehemently rejected by crisis-hit countries.

Germany's five wise men, including Wolfgang Franz, propose that a debt redemption pact must be underpinned by three crucial safeguards that prevent debtor nations from falling back into the old tracks of fiscal overspending.

"First of all, those countries must be obliged to enshrine a debt break or debt limit into their national constitutions," said Franz. In addition, the new debt must be paid for from a designated tax that would have to go directly into debt repayment, he added.

wolfgang franz (picture-alliance/dpa)

Franz sees no alternative to dept redemption across the eurozone

Finally, the German experts proposed that a country seeking funding under the pact would have to pledge their gold and currency reserves as collateral.

Franz said that the proposals would have the potential to dispel the fears of Chancellor Angela Merkel.

"She is refusing state financing through the ECB, as much as more fire power for the rescue fund and the introduction of Eurobonds. If Merkel refuses the Redemption Pact as well, I would really like to hear what she's suggesting instead," he added.

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