Germany Says “No” to Euro Bonds

Germany has signaled that it will not support plans to create euro zone-wide government bonds. German Vice-Chancellor Philipp Roesler was quoted as saying that “euro bonds are the wrong signal to weaker economies”.  

Germany has signaled that it will not support plans to create euro zone-wide government bonds. German Vice-Chancellor Philipp Roesler was quoted as saying that “euro bonds are the wrong signal to weaker economies”.  

Chancellor Angela Merkel of Germany has faced harsh criticism for being too passive in the face of Europe’s debt crisis. But on Monday, members of her own party and the Bundesbank made it clear just how hard it would be for her to pursue any solution that asked German taxpayers to sacrifice for the sake of European unity, the New York Times reported. 

With many economists calling for Europe to expand the euro zone’s bailout fund or start issuing bonds guaranteed by all 17 of the countries that share governance of the common currency, German politicians at home struck back.

[quote]“Euro bonds would push up German interest rates,” Philipp Missfelder, the foreign affairs spokesman for Mrs. Merkel’s Christian Democratic Union, said Monday after a meeting of the center-right party’s board. “The cost of servicing the debt would be enormous.”[/quote]

Meanwhile, the Bundesbank, representing the views of Germany’s monetary authorities within the European Central Bank, complained Monday that liabilities acquired by weaker countries were being offloaded onto the stronger ones.

[quote]“A major step is being taken toward common assumption of risks from weak national finances and economic missteps,” the Bundesbank said in its monthly bulletin. “This weakens the foundation of fiscal responsibility and self-discipline.”[/quote]

The president of the Bundesbank, Jens Weidmann, is Mrs. Merkel’s former economic adviser.

Germany is the euro area’s largest and richest country, and no solution to the Continent’s debt crisis can succeed without German political support and German money.

Related: Europe’s Last Hope – Will Germany Step Up?: George Soros

Germany “would have enormous power if it took the initiative,” said Daniel Gros, director of the Center for European Policy Studies in Brussels.

[quote]“Now would be a time when they could do something,” he said of Mrs. Merkel and other German leaders. But “I’m not holding my breath.”[/quote]

Many analysts complain that while Mrs. Merkel and other leaders, like Wolfgang Schäuble, the German finance minister, have made broad statements about cutting debt and promoting closer economic cooperation in Europe, they have offered few specifics and no timetable.

During a morning-long meeting of the party’s board in Berlin, the first since the summer recess, Mrs. Merkel told party leaders that she would not support the issuance of common European securities. Mrs. Merkel was repeating the position she voiced Sunday in an interview with ZDF television.

Advocates say euro bonds would allow members of the euro zone to pool their financial strength and hold down borrowing costs for weaker countries like Greece or Spain.

But even the most outspoken advocates acknowledge that even if German leaders agreed, it would still be unlikely that euro bonds could be issued soon enough to help much in the current crisis. Common debt would have to be accompanied by tougher rules on fiscal prudence, which would take months if not years to negotiate.

“I believe that is where we are headed, but it is not going to happen overnight,” said Laurent Bilke, head of European interest rate strategy at Nomura in London. “That is why the market is in a bad mood. There is no obvious quick fix that you can think of.”

Leading stock indexes in Europe and the United States rose Monday after brutal losses last week that were caused in part by investors’ doubts that European leaders were capable of developing an adequate solution to the debt crisis. That is a reason few analysts expect that the stock market turmoil is over.

In the absence of a more potent political solution, the European Central Bank has steadily increased the scope of its activities, most recently intervening in bond markets to prevent borrowing costs for Spain and Italy from reaching dangerous levels.

The central bank disclosed Monday that it spent 14.3 billion euros ($20.5 billion) buying government bonds on open markets last week, down from 22 billion euros the week before. The central bank does not disclose which bonds it purchases, but Mr. Bilke said the bank appeared to be buying 10-year Italian and Spanish bonds with the aim of holding their borrowing costs below 5 percent.

If yields rise back to 6 percent or more for any extended period of time, it would most likely prove too expensive for the countries to bear.        

 

Some analysts have questioned whether the central bank has the will necessary to control the market for Italian and Spanish debt over the long haul. But Mr. Gros said he thought the bank would probably have little choice but to continue buying bonds because the future of the euro was at stake.

A small minority on the central bank’s governing council opposes the bond intervention but is not powerful enough to stop it, analysts say.

Mrs. Merkel told party leaders on Monday that common debt would take away the incentive for countries in financial difficulties to become more competitive. In addition, she said, euro bonds would violate the treaty among euro members that stipulates that countries cannot bail each another out.

After the party meeting in Berlin on Monday, leaders said there was a difference of opinion between Mrs. Merkel and Mr. Schäuble, who is considered a more passionate defender of European political and economic integration.

“The atmosphere was good and consensual despite the differences between the chancellor and the finance minister,” Mr. Missfelder said.

Mr. Schäuble belongs to the generation of party leaders who came of age in the shadow of Helmut Kohl, the former chancellor who was a consistent advocate of stronger European government. It was Mr. Kohl who pressed Germans to give up their beloved Deutsche mark for the euro.

But that pro-European view is no longer popular among the conservatives.

One reason, analysts say, is that Mrs. Merkel grew up in Communist East Germany, where she did not experience the aftermath of World War II and the deepening integration of Western Europe in the same way as Mr. Kohl.

The result is that, for the first time in nearly two decades, the Christian Democrats are unsure of what kind of Europe they want — so much so that the party is preparing a special discussion on Europe when it meets for a congress in November.

Hermann Gröhe, general secretary of the Christian Democrats, announced after the board meeting on Monday that a special commission was being set up to prepare a motion on Europe. Mr. Schäuble will lead the commission.

The deliberate pace of the debate is at odds with the demands of financial markets, however.

“We still believe that the euro area is proceeding, by fits and starts, in the direction of a closer fiscal union,” analysts at Credit Suisse said Monday.

“The problem is that the process is moving too slowly for financial markets but too rapidly for politicians and their electorates.”