If eurobonds sound good, why is Merkel playing deaf?
The euro crisis is coming to a head with many experts predicting that it is inevitable that Greece will leave the single currency, although eurobonds are being touted as a possible solution. The Guardian answers a few questions about them.
What is a eurobond?
It is a collective debt: part of the problem facing some eurozone countries is that they are struggling to borrow from financial markets at affordable interest rates.
If the European Commission, for example, could borrow on behalf of all eurozone member states by issuing joint bonds, the cost could be lowered for countries such as Italy and Spain because investors could be confident that stronger countries stood behind their debts. Analysts calculate that Portugal, for example, would see annual repayments fall by €15-billion, or almost 9% of its gross domestic product (GDP), as its interest rate fell to the eurozone average.
Over time, the outstanding debts of countries such as Greece could be turned into eurobonds and paid off by the eurozone as a whole. The policy would send a powerful message of solidarity, making it harder for credit ratings agencies and investors to target individual countries.
Newly elected French President François Hollande, Italian Prime Minister Mario Monti and the Paris-based Organisation for Economic Co-operation and Development have thrown their weight behind the idea. The European Central Bank is also in favour of it.
How did the eurozone get here?
For much of the euro’s first decade, financial markets treated many euro countries as though they were issuing common bonds and countries such as Greece and Italy paid little more to borrow than Germany or France. Investors simply assumed that eurozone countries were yoked together and, if one got into trouble, it would be bailed out by its partners.
In theory, the eurozone’s stability and growth pact was meant to impose strict deficit limits to prevent countries going astray, but the targets were repeatedly missed, including by Germany and France.
After the credit crunch, doubts began to emerge about whether, and how, Greece and others could afford to repay their debt burdens. Without any agreed bailout mechanism, markets suddenly began to assess the solvency of each country separately and the cost of borrowing shot up across recession-hit states, driving them towards budgetary crisis.
Why do they not just issue the eurobonds?
Eurobonds might sound great to Greece, but they go fundamentally against Germany’s approach to resolving the crisis. Collectivising debt removes the incentive for countries to put their public finances in order.
If Germany’s borrowing costs rose to the eurozone average, it could cost it an extra €50-billion a year in repayments, almost 2% of its GDP.
Also, Germany’s constitutional court has made clear that it is not willing to sanction open-ended bailouts of other countries and German voters may not be ready to bail out the single currency zone in the way the policy implies.
Are eurobonds the answer?
No. They could help to calm the market panic and ease the immediate budgetary crisis of some countries. But a eurobond would do nothing to reduce overall levels of debt, let alone tackle the underlying structural problem, which is that countries such as Greece are simply unable to compete fairly with their eurozone partners.
Is there a compromise?
Yes. There are modest versions of a eurobond, by which countries would still be responsible for the majority of their debts, with the commission just picking up the riskiest slice, for example.
Such an arrangement might be more palatable than a full-blown collectivisation of the debt. But the less ambitious the plan, the less likely it is to succeed.
There is also a proposal for €230-million of so-called “project bonds”, which would see euro countries jointly raise finance for specific infrastructure schemes. This would do nothing to resolve the mountain of outstanding debt, but it might be enough of a sop to Hollande for him to be able to claim he has shifted the debate towards growth.
What is the chance for eurobonds?
German Chancellor Angela Merkel and her finance minister have repeatedly expressed their opposition, but they will face intense pressure from Hollande. Monti also has Merkel’s ear, but Italy would be a major beneficiary so he is likely to be seen as talking his own book. Another powerful Italian, European Central Bank president Mario Draghi, favours eurobonds, but so far Germany has paid little heed to his demands for more rescue measures.
British Prime Minister David Cameron has also been urging a more collective approach, but his view counts for little in Germany since he infuriated Merkel by vetoing a new European treaty last year. – © Guardian News & Media 2012