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27th Feb 2021

Germany backs pooling of debt, no joint liability

  • Erasing debt: No solution for Germany (Photo: Images Money)

The idea of a debt redemption fund for eurozone countries is not completely unpalatable to the German government, provided each state remains liable for its own debt, a German finance ministry official said on Friday (5 October).

"We had the idea of the debt redemption fund before the wise men group," Thomas Westphal, director for European policy in the German finance ministry told a conference in Berlin organised by the centre-right European People's Party.

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A panel of economic advisors last year suggested the setting up of a joint fund for countries whose total debt exceeds the EU limit of 60 percent of the gross domestic product.

But Westphal made clear that countries needed to remain liable for their own debt.

"There are calculations that the joint debt above 60 percent would amount to some €3,000 billion. Joint liability for such a sum would never fly in Germany, but that doesn't mean that the whole idea of the debt redemption fund is dead," Westphal said.

The finance ministry official insisted that it was a good idea to have a more structured way of paying back excessive back, "as part of the lessons this crisis thought us."

Speaking at the same event, the head of Germany's savings banks, Georg Fahrenschon - himself a former minister of finance and MP - said that this redemption fund idea needed to be picked up again.

"We could set it up step by step, take up a first chunk of debt, then a second only if the reforms are implemented," Fahrenschon said.

He also pointed out that when Germany was the "sick man of Europe" 10 years ago, it cushioned labour market reforms and austerity measures with debt.

"This worked out because growth was restored eventually, but for other countries it is not so obvious," the financier said.

Back in Brussels, officials negotiating a draft paper on the future of the eurozone are sceptical there will be any movement on the debt redemption fund this year, however.

"My feeling is the idea is pretty dead for the moment," one source told this website.

Back in June, the idea featured in a first report on the future of the eurozone tabled by the four presidents of the Eurpoean Council, Commission, Central Bank and Eurogroup of finance ministers.

"Steps towards the introduction of joint and several sovereign liabilities could be considered as long as a robust framework for budgetary discipline and competitiveness is in place to avoid moral hazard and foster responsibility and compliance," the paper suggested.

It listed several option for "partial common debt issuance," such as short-term bonds and a redemption fund.

A few months later, in an "issues paper" tabled by Council chief Herman Van Rompuy, the idea was taken up again, but without any details: "limited common debt issuance as long as the risk sharing is accompanied with commensurate steps towards common decision- making on budgets that safeguard against moral hazard."

Draft conclusions ahead of the October summit which is to decide on further steps on the future of the eurozone however mention nothing on this matter. A draft of the new Van Rompuy report will be sent to member states next Friday (12 October) ahead of the EU summit.

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