Germany: What about Eurobonds?

While the Federal Government is opposed to the idea of  Eurobonds, the German Council of Economic Experts recommends the establishment of a European Redemption Pact, under which a country could refinance itself through the European Redemption Fund (ERF) up to the point where the debt refinanced reached the current difference between the debt outstanding and the hypothetical debt that would equate 60% of GDP. There appears to be a swing in the debate on ERF and the opposition seems to increasingly demand this in exchange for support on the fiscal compact.

In the official German 2012 Annual Economic Report of the economics ministry both, the federal government and the German Council of Economic Experts reject the idea of Eurobonds. The report, however, mentions the idea of setting up a debt redemption pact proposed by the Council of Economic Experts if the stabilization measures already agreed were to prove inadequate.

This corresponds to official statements  by Wolfgang Schäuble’s or Angela Merkel’s, who underlines notably the incompatibility between the bonds and EU treaties. FDP leader Rainer Brüderle precludes the introduction of Eurobonds in the short or medium run and calls them “Zinssozialismus” (Interest socialism) in an interview with Die Welt. “Savoir-vivre cannot mean that a few have to pay, while the rest enjoy.” In an interview with Le Monde on 25 May 2012, Bundesbank President Jens Weidmann states that “believing Eurobonds would solve the current crisis is an illusion”. “You do not confide your credit card to someone without any possibility to control his expenditures.”  Volker Kauder, Chairman of the Christian Democratic Union/ Christian Social Union (CDU/CSU) parliamentary group in the Bundestag, expresses on the blog of the CDU/CSU on 25 May 2012 his position against Eurobonds.

Apparently, Merkel gets recently support from the opposition on the issue. SPD leader Sigmar Gabriel does not support the creation of commonly guaranteed debt and Grünen leader Jürgen Trittin says that Eurobonds necessitate a modification of the treaties, which is not possible in the short run.

While the Federal Government reaffirms its opposition to the introduction of the European redemption fund (ERF) there seems to be a change in orientation among opposition representatives according to the Frankfurter Allgemeine Zeitung on 24 May 2012. The SPD officially proposes the introduction of ERF and the Grünen approve the idea of the ERF that, according to Trittin, “combines the advantages of low interest rates through common European bonds with debt reductions”. This u-turn is linked to the forthcoming vote on the European Fiscal Pact in June that needs a two-thirds majority in both Bundestag and Bundesrat. SPD and Grüne require the introduction of ERF as one condition for their approval of the Fiscal Pact. Trittin told Reuters that the Chancellor “has to modify her financial and economic Policy if she wants to have the Fiscal Pact ratified.” Moreover, “she has to give up her blockade to ERF.”  According to Gabriel the Federal Government is “still opposed” to the proposal of ERF, which represent for him a good alternative to Eurobonds by reason of clearer conditions.

According to Reuters the next council between the coalition and opposition will be held on 13 June. The Federal Government will until then work out the propositions of the SPD and Grüne including the introduction of the ERF.

Bloggers and commentators often oppose the idea of Eurobonds.  Thomas Hanke states in the Handelsblatt on 29 May 2012 (subscribed version) that Eurobonds are certainly not an instrument to achieve more growth in the next months in Europe, Wolfram Weimer in the Handelsblatt argues that Eurobonds constitute nothing other than the socialization of national debt at the expense of Germany and  Günter K.V. Vetter on Karpfenteich supports Angela Merkel in her opposition to Eurobonds.

Others have a more differentiated view on this. Claus Hulverscheidt in the Süddeutsche Zeitung on 24 May 2012 quotes Brüderle saying that introducing Eurobonds now would be the same as “giving whiskey to an alcoholic”, but that their introduction may be possible in the long run. Brüderle’s statement is surprising given that the FDP considered until now the Eurobonds as absolute taboo, even in the long run. Hulverscheidt agrees with Brüderle, that Eurobonds have to be the final step of the European integration process. Merkel should send this signal to her European partners.

Wolfgang Münchau writes on 23 May 2012 in the Spiegel that the SPD do not have the courage to claim “real” Eurobonds and misses by that a opportunity to advance in the European integration due to a “lack of killer instinct”. 

André Kühnlenz writes on 24 May 2012 in the Financial Times Deutschland that Eurobonds may help to stop the exodus of capital that is currently escalating in Spain and Italy. He agrees basically with the idea of the Bundesbank that we need a fiscal union before the introduction of Eurobonds, but, he thinks that there is not enough time and a solution is needed until the summer in order to preserve the euro. He refers to Yanis Varoufakis, who envisaged in his paper a type of Eurobonds that could be introduced without changing the EU treaties.  According to Kühnlenz, it is clear that the Euro zone will not settle its current problems without Eurobonds. If Europe still wants to play a role in the world, it must jump over its own shadow.

Kantoos finds Varoufakis’ proposal of ECB bonds less convincing. The latter involves the ECB issuing bonds on the member states’ behalf, having the states pay off their debt at the ECB, and having the EFSF/ESM guarantee the losses of the ECB “in the remote case that some members do not redeem their bonds in the distant future.”Sure, ECB bonds would probably have German rates, which would be fair. However, it is not clear who would stand behind these ECB bonds – either the (recapitalized) ECB, or the insurance by the EFSF/ ESM. Thus, in the end, the other European governments would have to pay. Moreover, issuing ECB bonds would increase the yields on other bonds. Therefore, he does not consider the ECB bonds as a real alternative and thinks that they are very close to the commonly proposed Eurobonds.