By Anthony Harrington
What was needed to stop European markets from slip sliding their way to a deep recession, once again, was for European leaders to step up and announce that they’d found a way to give the world euro bonds. A single Europe-wide bond backed by everyone, but in reality backstopped by the Germans, would have calmed markets.
There is very little doubt on this. No less an oracle than George Soros, in an interview with the German paper Der Spiegel, made the point with great clarity while lambasting German politicians for displaying a deplorable lack of leadership over the euro crisis. He told the paper:
I think there is only one choice. It is not a question of whether Europe needs a common currency. The euro exists and if it were to break apart all hell would break loose. Germany has to make it work. To make it work, you have got to allow the members of the eurozone to be able to refinance the bulk of their debt on reasonable terms. So you need this dirty word: "euro bonds".
Soros went on to say that euro bonds would only work if Europe put together something like a fiscal union. He suggested that this could be done if Europe could establish fiscal rules that ensured the solvency of every member. This, of course, is a tautology. If all the euro states were clearly solvent, there wouldn’t be any European sovereign debt crisis and the markets would all breath easy again.
The start of a beautiful friendship
Without this 'lite' version of fiscal union, the Germans will resist the creation of euro bonds, very naturally, since, as the eurozone’s strongest economy, they would be seen as backstopping everyone’s debt. Not something they want to do. This, it seems, was pretty much what the German Chancellor Angela Merkel told the French President Nicholas Sarkozy at their famous meeting on Tuesday 16 August.
The two came out of their meeting and said, basically, that euro bonds would have to wait for some future date when there was true fiscal union. In the meantime, what they want, and what they expect the markets to wear, is agreement among all the members of the eurozone to submit their budgets for scrutiny – and amendment - to an independent overarching body. This would be, in Sarkozy’s words, “a true European economic government” and would comprise the heads of state and government of all the eurozone members, with Van Rompuy in the chair for the first two and a half years of the new body’s existence.
The markets were less than enthused, but at the time of writing, deep into the evening of August 16, they hadn’t gone into a tailspin. The Merkel-Sarkozy proposal is for all member states to amend their constitutions by the time the Olympic Games get going in London, and, as a gesture of harmony, they pointed out that a common French-German corporate tax rate would be established by 2013.
A euro bond is a euro bond
The point about euro bonds, of course, is that by doing away with specific national bonds you also, at a stroke, do away with penal rates of interest for the walking dead euro peripheral economies. They would get to borrow at the same rate as Germany, since a euro bond is a euro bond. That would undoubtedly push up borrowing costs for Germany, France and the “solid” euro core, but it would make it vastly easier for the likes of Italy and Spain to roll over their debt.
However, German politicians already know that they have a next-to-impossible job selling anything resembling the euro bond idea to their citizens. What Merkel is clearly hoping is that with some kind of fiscal union 'lite' in place, and with all the eurozone countries running balanced budgets under the watchful eye of Van Rompuy, German citizens will lighten up and the euro bond idea will finally fly. The markets, however, may well not allow the politicians that kind of leisurely time frame. Euro bonds now were what they were hoping for and that is not what they have been given. Which means the euro crisis will roll on and on until, as Soros says, the euro bond is conjured into existence and the Germans accept that the buck stops with them.