EUROPEAN DIARY: As euro zone growth slows, the debate about commonly issued sovereign debt persists
LIGHT YEARS ago, when the euro debt mayhem looked like it might just be confined to smaller countries such as Ireland, German finance minister Wolfgang Schäuble decried the tendency to come up with a bright new solution every single day. Complain he might, but Schäuble himself is not averse to inveterate proposal-making.
Back from holidays last week and braced for inevitable autumn battles, Schäuble unburdened himself of the notion that the crisis demands yet another European treaty to give new economic powers to the EU institutions. Not content with a modest revision to the Lisbon pact to dribble around the “no-bailout clause”, Schäuble says Europe now needs to go further.
Whether this is remotely feasible in the short term is doubtful. A new treaty would take years to prepare, raising valid questions as to what immediate action is taken to settle the turmoil in the here and now.
Then there is the ratification dilemma. What are the odds on the success of another Irish referendum? Zilch. The advance of anti-EU parties in a swathe of other countries points to serious trouble elsewhere too.
Still, Schäuble’s intervention reflects the widely held view in Germany and beyond that considerably deeper economic integration in the euro zone is essential if the single currency is to survive in its present form.
Contentious moves in this direction have been under way since the outset of the crisis, heralding an inexorable seepage of national economic sovereignty to Brussels. This may, however, be the flip side of a grand bargain in which Germany eventually resigns itself to the advent of commonly issued sovereign debt in the form of eurobonds.
In Brussels and further afield, eurobonds are still held out as the panacea to the crisis. If the disruption flows from overpricing of debt issued by wayward peripheral countries, such bonds would supposedly impose order because the market would set their price in line with calmer economic conditions in the larger countries at the euro zone’s core.
In essence, weaker countries would borrow with the guarantee of wealthier partners. This would reduce the cost of borrowing for the weak, but increase it for strong countries. This helps explain Germany’s reluctance.
Nor are the Germans alone. The Finnish push for bailout loan collateral from Greece – mirrored by similar pressure from the Netherlands and Austria – suggests other wealthy counties would be no walkover in a eurobond scenario. Whether this becomes the present debate’s end point remains to be seen.
It seems clear, however, that a new form of debt issuance will not come without significantly greater fiscal discipline being imposed on the weaklings. This is embraced in EU Commission- inspired legislation to toughen the euro zone’s rule book, the finer details of which remain bogged down in a long dispute with the European Parliament.
Yet the persistent tone from Berlin smacks of a desire for something altogether stronger, with more and more central co-ordination and less scope for national wriggle room.
German attention centres on a stringent governance scheme operating between countries in their own right, with a lesser role for the commission, the traditional protector of small countries. No matter whether the structures are laid down in a new treaty or elsewhere, the direction is clear enough. Either way, eurobonds will not happen without this kind of move.
For all parties, questions of political legitimacy abound. Can a stricter rule book be the basis for Germans and the citizens of other rich countries to go on the hook in perpetuity for others’ debts?
If the system is to gain traction with them it would have to be very robust indeed, with the unambiguous enforcement of very tough international rules. We already see something like that in the existing bailouts, with aid recipients subject to an exceptional degree of external oversight. But are European leaders really ready to enshrine that kind of external intrusion into their everyday economics?
The unsavoury experience of the Franco-German assault on Ireland’s corporate tax regime is a case in point. This suggests any other country out of favour with the core might receive the same kind of treatment.
Would Irish voters and their leaders go along with a permanent form of oversight with strictures akin to those in the EU-IMF programme? Hardly. While anything that serves to prevent a repeat of grievous past errors makes sense, most people prefer home-grown economic policy. It’s the same everywhere.
These are the kinds of tensions at work as EU leaders resume battle against the debt emergency. They know they came very close to catastrophe last month when Italy and Spain nearly fell from the rails. As economic growth slows, the problem has the potential to worsen appreciably very quickly.
This is why the eurobond debate still lingers, even in the face of Germany’s resistance. While Berlin’s asking price may be to have the euro zone economy rebuilt in Germany’s image, this may prove to be a step too far.
