Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
It is still very early in the conversation but the fact some European leaders are seriously considering a region wide bond is definitely a sea change. This news came out yesterday and while Germany will resist, it will be interesting to see if over the next 6-12 months the idea of a “eurobond” gains momentum. The bond would obviously help protect the weaker countries in the region (letting them borrow at rates they otherwise would not) and be a penalty for the stronger countries (namely Germany). So Germany has to consider if its worth the cost and/or if this is a cheaper way to maintain a flawed system in a current form – which gives it a currency far weaker than it would have outside of the EU.
Via NYT:
- When European leaders meet on Wednesday to discuss the troubles of the euro zone, France’s president will press the issue of euro bonds, his finance minister said in Berlin on Monday. Yet, while the German government has been receptive to many proposals to revive growth on the Continent, officials here said euro bonds might well be a step too far.
- Pierre Moscovici, France’s newly appointed finance minister, traveled to Berlin for talks with his counterpart, Wolfgang Schäuble. In a news conference after the closed-door meeting, both characterized the exchange as friendly and productive, but Mr. Moscovici acknowledged that the two men, and their governments, had real differences of opinion over pooling obligations to use the credit of the strongest European countries to prop up the weaker ones, an approach achieved through euro bonds.
- Mr. Hollande’s victory in the French election has pushed the question of how to kindle economic growth in the euro zone to the top of the agenda, challenging the focus of Chancellor Angela Merkel of Germany on trimming back budget deficits to reduce indebtedness. Ms. Merkel has signaled flexibility on some of Mr. Hollande’s ideas, including more financing for the European Investment Bank and redirecting unspent European Union funds to try to fight unemployment.
- But the German government is staunchly opposed to euro bonds until deeper integration and harmonization of budgetary and public spending policies have been achieved. Most Germans see euro bonds as another way for fellow European states to benefit from, and ultimately drag down, Germany’s unblemished credit rating.
- In his remarks to reporters at Camp David, Mr. Hollande promised to raise the issue of euro bonds at the informal European summit on Wednesday, and said “I will not be alone in proposing them.” Prime Minister Mario Monti of Italy and Prime Minister Mariano Rajoy of Spain are expected to support him but the plan will have little chance without the backing of Germany, Europe’s largest economy.
- Mr. Hollande has his work more than cut out for him if he expects to bring the Germans around. In the absence of strict controls, German policy makers say, euro bonds would be comparable to the United States’ agreeing to pay off Mexico’s debts, almost like a blank check for nations that are in trouble for overspending in the first place.
- The European Commission floated the idea of bonds issued jointly by euro zone governments in November, suggesting that such “stability bonds” could be created “in parallel” with moves toward closer fiscal union, rather than at the end of the process, as the German government prefers, to “alleviate tension” in sovereign debt markets.
- “From an economic point of view this makes sense,” a commission spokesman, Amadeu Altafaj, said Monday. “But at the end of the day this is a political decision that has to be taken by the member states of the euro area.” Mr. Altafaj added that “any form of common debt issuance requires a closer coordination of fiscal policies, moving toward a fiscal union, it is a prerequisite.”
These last few points are key. What is missing in Europe is a fiscal union. Unlike the U.S. and its member states where a central organization controls the fiscal (and monetary) levers, there is no such thing in Europe. Of course “member states” in the U.S. are simply states, and not entire countries – so the situation is far more complex across the Atlantic. But to make a common currency viable eventually there is going to need to be a push towards a fiscal union. Or the common currency should be disbanded – otherwise none of the currency adjustments that make individual countries competitive can occur.
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