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22nd Jul 2019

MEPs struggle to keep Eurobonds idea alive

MEPs have kept alive support for joint liability Eurobonds despite critics describing the plan as "a socialist loonie-land" and a way to create a transfer union by the back door.

A majority of deputies backed a report by French liberal Sylvie Goulard on Wednesday (16 January) calling for governments and the European Commission to keep working on the issue, and for the immediate introduction of short-term Eurobills and a European Redemption Fund to pool excess debt.

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  • An EU debt market is not going to happen any time soon (Photo: aranjuez1404)

The Goulard report, which is not legally binding, sets out a possible road-map eventually leading towards a mutualised debt market for the eurozone. It calls on member states to start by setting up a 25-year Redemption Fund and introducing Eurobills to replace short-term debt.

MEPs, who are more federalist than national governments, have championed Eurobonds for several years as part of the re-writing of the eurozone's rules on economic governance. They are currently blocking key budgetary oversight legislation referred to as the "two-pack' until ministers agree to create a redemption fund.

Under the proposal originally put forward by the German Council of Economic Experts, a redemption fund would pool the debts over the 60 percent debt-to-GDP threshold, with participating member states required to reduce their debt each year.

The EU would then move towards a treaty change to enable a fully mutualised EU debt market which could also form the basis of a special budget for the eurozone.

Germany and Finland, both of whom have retained a AAA credit rating, are amongst the most vocal critics of Eurobonds, fearing that shared debt liability would push up their own borrowing costs and do nothing to increase the competitiveness of the bloc's weakest economies.

Critics warn that pooling debt would also create a de facto transfer union and state a mutualised debt market would require changes to the EU treaties, specifically the 'no bail-out' clause in Article 125.

German MEP Werner Langen, leader of Angela Merkel's christian democrat delegation, described the plan as a "socialist loonie-land" which had been "decisively rejected" by ECB President Mario Draghi.

The Commission published a Green paper in November 201l outlining possible ways to introduce a debt system that would make EU countries liable for each other's sovereign debt. Support for common bonds grew as a raft of EU countries came under speculative attack from financial markets, forcing up borrowing costs and driving countries to the brink of bankruptcy.

Supporters say that using differing interest rates and binding reform contracts as conditions for participating in a mutualised debt system would reduce moral hazard and act as an incentive for member states to keep to EU debt and deficit rules.

However, with financial markets calmer in the second half of 2012 following ECB President Mario Draghi's statement that he would do "whatever it takes" to save the euro, Eurobonds have drifted from the top of the agenda on the future of the eurozone.

The blueprint on reforming EMU drafted by European Council President Herman van Rompuy, which formed the basis of discussions at the December EU summit, did not raise the prospect of mutualised debt instruments in the coming years.

Speaking in Parliament on Tuesday (15 January), Economic and Monetary Affairs commissioner Olli Rehn commented that "common debt issuance can potentially play an important role" in what he described as "the profound rebuilding of Economic and Monetary Union" although he downplayed the chances of swift action.

"It is indispensable that the risks of moral hazard are addressed first," he said, adding that "the guiding principle remains: there can be no further mutualisation without deeper integration."

Goulard, herself, said that "we are not asking to issue Eurobonds today but to continue and to deepen our evaluation of this instrument."

"In the long term, we should aim at issuing common debt for a genuine EU or eurozone budget," she concluded.

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