In My View by CHRIS GRAEME [email protected]
The European Commission has given its first hints that the European Union is planning to move towards budgetary and political union to avoid a total collapse of the Euro.
As part of this U-turn, the EU Commissioner, José Manuel Durão Barroso, uttered the first vague statements for the creation of the controversial Eurobond.
The idea, which until now has been officially rejected by the vast majority of member states, (but unofficially Italy, Greece, Portugal and Spain think they are a good idea) is to issue a common Euro debt bond as a way of calming the markets, ending speculation, reducing ratings agencies’ fears and spreading the responsibility of Europe’s sovereign debt problem.
On Wednesday, the day the Algarve Resident went to press, Durão Barroso outlined his first thoughts on the matter during a long-awaited debate in the European Parliament on the ‘State of the European Union’ – a new innovation introduced last year that seeks to imitate the similar debate in the United States.
Manuel Barroso, who until now has successfully avoided getting his hands dirty with the responsibilities of taking a decision on the EU strategy for getting out of the crisis, is now under strong pressure from key political groups within the European Parliament to take a more pro-active stance in managing the euro crisis.
Already last week analysts and unofficial sources close to the IMF and EU have admitted that it is a matter of months before Greece defaults on its massive debts and will have to leave the euro currency until it gets its house in order.
That decision, now seen as inevitable and even desirable, would leave French and German banks seriously out of pocket since those institutions and the European Central Bank hold the lion’s share of Greece’s sovereign bonds – i.e. its state debt.
Even so, despite stock markets plummeting last week across Europe, concerned that France’s banks could collapse over the fallout of a Greek default, French bankers rushed to issue statements that they were not undercapitalised and could withstand the eventual Greek storm.
So what are Eurobonds and what form would they take? They would be public debt bonds issued by a number of euro member countries to ensure their continued financing.
The European Union already has a type of ‘Eurobond’ which is represented by the loans conceded to Portugal and other debtor countries via the European Financial Stability Fund (EFSF).
The difference is that in this new case, the bonds or debt issued by the European Union as a whole, rather than individual member states, are solely destined to help those countries in difficulty, while Eurobonds would be a blanket bond to cover all or part of the European Union’s debts.
Advantages
The advantages would be to lower the costs of refinancing countries in serious debt (Greece, Ireland, Spain, Italy and Portugal) – investors would no longer have reasons to speculate and demand high interest rates to cover the risk of default since these states’ debts would be guaranteed by the others.
The sticking point is Germany or more accurately the German public and conservative political groups in the Reichstag who are dead set against the adoption of Eurobonds.
According to polls in Germany the general public is against propping up profligate southern European countries and fear that the Eurobond will increase its own contribution costs massively.
In fact the Munich-based Centre for Economic Studies (IFO) has calculated that if the Eurobonds are created now, the interest rates on German debt will shoot up by 47 billion euros a year.
The ‘prudent’ countries also fear that Eurobonds will kill any incentive for the ‘undisciplined’ countries to reduce their debt and expenditure since will no longer have to face market sanctions and could, theoretically, just carry on spending at Germany’s, Holland’s and France’s cost.
But there are equally fears, which were raised by former Labour Chancellor of the Exchequer, Alistair Darling ,over the weekend that continuing to enforce tougher and tougher austerity measures on countries that will never be able to pay off their staggering debts, will only be counterproductive and stifle any growth these countries still have.
If the Eurobonds go ahead, and it seems increasingly likely they will have to, there would need to be some kind of European control on individual member state’s national policies in order to avoid irresponsible actions – that would imply transferring a sizeable chunk of national sovereign autonomy in terms of fiscal and financial policies and budgetary considerations to Brussels.
If this is the case, that in turn means a step closer to European Union fiscal and budgetary union and a United States of Europe. Whether individual countries like Portugal, Spain and Italy would be prepared to come under what in effect would be German suzerainty, is another question.
