Are Euro Bonds the Right Answer For Europe?

Yesterday U.S. stock markets rallied late in the afternoon after news spread that Italian Prime Minister Mario Monti gave some feedback from the informal EU Summit in Brussels, saying on Italian television  that “Europe can have Euro bonds soon” and “Greece is likely to remain in the euro zone.”

Later in the interview, Monti said that Euro bonds should be considered “when the time is right, but not in too long.”

Monti is confident that he can persuade German Chancellor Angela Merkel to embrace the introduction of Euro bonds for the common good of Europe despite her reluctance and insistence to keep the focus on austerity to cure Europe’s economic woes.

Monti’s summary of the EU Summit differed sharply from Luxembourg Prime Minister  Jean-Claude Juncker, who told reporters in Brussels that joint debt sales “didn’t find much support,” especially in the German-speaking area.

A Euro bond is a new type of bond that would collectively guarantee the debt from the 17 member Euro zone countries rather than from a single European country. Debt would be shared on a collective basis rather than being assumed by one single country. There are still many unanswered questions about how the Euro bonds will be implemented along with government bonds of the individual member governments.

Euro bonds are a divisive issue within the Euro zone because countries with strong balance sheets such as Germany and the Netherlands which have resilient economies and low bond yields or borrowing costs, would have to play on a level playing field with all Euro zone countries, including heavily indebted countries with weak economies on the periphery in southern Europe (E.G. Greece, Spain, and Italy) that would be able to borrow at the same interest rate.

Germany is concerned about a potential scenario in which the introduction of Euro bonds could diminish the resolve of indebted governments to balance their budgets and follow through with their austerity commitments. Germany has maintained that Euro bonds “don’t make sense” right now, pointing out that the 17 member Euro zone states conduct their own economic policies and don’t share fiscal unity. 

On Tuesday Dutch finance minister Jan Kees de Jager told Dutch TV station RTL 7 that his government was not adamantly opposed to collective borrowing in principle but Euro bonds could only be introduced after Europe had made significant progress towards full fiscal union.

European Union leaders met informally  in Brussels on Wednesday and discussed among other topics, the possibility of introducing a Euro bond to help spur growth in the Euro zone.

Newly elected French PM Francois Hollande is one of the primary cheerleaders for Euro bonds along with Jose Manuel Barroso, President of the EU Commission. Pushing Euro bonds into the Euro zone is being justified under the banner of growth.

While it is true that the core of Europe is in better shape to produce future growth in the Euro zone, the countries of southern Europe (Spain, Greece, Italy, Portugal) and Ireland are carrying much higher debt levels than core members and threaten the long term cohesiveness and stability of the Euro zone.

If these weak economies are unable to show any improvement and grow in the future, then they will likely default on their loans from Brussels and Frankfurt, causing future havoc throughout the Euro zone.

Greece’s unemployment level for February was 21.7%. Spain’s unemployment level for March was 24.4%, the highest in the Euro zone. Italy has 10 % unemployment but a 1.95 trillion euro debt load, the 4th largest in the world.

Asking stronger countries in the Euro zone to assume the debt from weaker periphery countries may be a hard pill to swallow for healthy core countries that pride themselves on low unemployment, strong credit ratings, responsible fiscal management, and successful economies that have provided a comfortable quality of living for their inhabitants.

However, continuing to operate a policy that only adheres to austerity is short sighted and does not address some of the long term fundamental barriers that austerity causes, namely a retracting economies that do not promote investment and consistent spending throughout the broader economy.

Embracing Euro bonds by member countries in the Euro zone will require a greater willingness among member nations to work towards fiscal unity by shedding nationalistic and provincial impulses while adopting a new mindset that emphasizes stabilizing Europe and forging a new European identity.

Greece

The latest poll released in Greece shows that the anti-bailout leftists party Syriza have increased their weekly support lead from 28% to 30%.  New Democracy (pro-bailout) has increased their support from 24 to 26%. Pasok has 15.5% support.

Meanwhile, 85% of Greeks want to remain in the Euro and yet 62% of Greeks remained opposed against the austerity terms of their bailout package.  Elections are set for June 17th.

 

 

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