Wednesday

1st Dec 2021

Brussels sees no serious opposition to eurobonds

  • Commission: 'Stability Bonds must not lead to a reduction in budgetary discipline' (Photo: Images_of_Money)

The European Commission has launched a polemic on eurobonds - a proposal that eurozone countries should guarantee one another's debt, taking member states into uncharted territory in terms of solidarity and trust.

The executive put forward its ideas in a 38-page discussion paper on Wednesday (23 November), which sets out three scenarios for eurobonds ranging from a "full replacement" of national bonds to a partial replacement.

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Announcing the controversial ideas, European Commission President Jose Manuel Barroso said it was part of his institution's "duties" to bring such discussions forward and called on member states to approach the issue with an "open mind" that is "free of dogma".

The comments particularly concern Germany, the eurozone biggest economy, which has been vocal in its opposition - expressed once again on Wednesday morning by the Chancellor, Angela Merkel - to eurobonds as an immediate solution to the eurozone's debt crisis.

The ideas are first to be discussed publicly, after which the commission will come out and say which option it prefers. The 'green paper' approach is a way of having much of getting the adversarial discussion out of the way before a legislative proposal is put on the table.

The idea of eurobonds - to be issued jointly by the 17 eurozone governments at a single interest rate - has been gaining some traction as the eurozone seeks a way out of its sovereign debt crisis.

At the moment, weaker eurozone economies have to pay investors high interest rates to hold their bonds. A eurobond could lower the interest rate. But there are fears in Berlin that it will result in the country paying higher rates to borrow money.

Barroso, for his part, believes that Berlin's opposition is merely on "timing" meaning "there is no opposition on principle." He also noted that past highly controversial ideas, such as allowing the eurozone bailout fund (the EFSF) to make purchases on the secondary bond market were eventually agreed by member states.

Three options

Of the three options the full eurobond, replacing the issuance of all national bonds, is seen as having the strongest "potential positive effects on stability and integration".

However it would require a change to the EU treaties - a long and arduous process with no guaranteed outcome - as would the second option which would see national bonds partially substituted by eurobonds.

The third "most limited" option - whereby eurobonds would partially cover issuance of national bonds but with no joint guarantees - is judged as the most hassle-free to get implemented but the one least likely to assuage the markets.

Moral hazard

The paper devotes a whole section to moral hazard, a particular bugbear of fiscally upright countries such as Germany, the Netherlands and Finland, who believe that the mutualisation of eurozone debt would allow less fiscally well-behaved countries to overspend with impunity.

"Stability Bonds must not lead to a reduction in budgetary discipline among euro-area member states" says the paper.

To reinforce the point, Wednesday's publication of the eurobonds discussion paper coincided with the publication of two draft laws that hugely increase Brussels' oversight over national spending, allowing it to make budget recommendations and to sanction states who appear to be in danger of heading off the correct spending track.

But even if the commission considers itself daring for stepping into the eurobond debate with an ideas paper, others say the proposals are meaningless without installing the European Central Bank (ECB) as a lender of last resort.

The ECB has to "act within the framework of the treaty" said Barroso, with EU rules apparently ruling out any move to make the bank the ultimate guarantor.

"The proposed 'stability bonds' will be toothless without an explicit provision of a lender of last resort support by the European Central Bank," said Sony Kapoor, managing director of Re-Define, an economic think-tank.

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The leaders of France and Germany are meeting on Tuesday in a further attempt to stem the eurozone debt crisis following last week’s strong market turbulence, but Berlin has ruled out any mutualisation of euro countries’ debt.

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