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Bundesbank Says Fiscal Compact Doesn’t Justify Common Euro Bonds

Germany’s Bundesbank said the euro region’s fiscal compact doesn’t form the basis on which common euro bonds can be issued.

“The fiscal compact doesn’t mark the introduction of a fiscal union and, hence, it doesn’t justify far-reaching shared liability, for example euro bonds,” the central bank said in an e-mailed statement today from Frankfurt. “Liability and surveillance would diverge” and “the framework of economic and currency union would become increasingly inconsistent.”

European leaders in January completed a treaty increasing fiscal discipline that speeds up sanctions on high-deficit states and requires euro countries to anchor balanced-budget rules in national law. Only countries that ratify the fiscal compact will be eligible for aid from the permanent bailout fund, the European Stability Mechanism.

“From a monetary-policy point of view, it is decisive that liability and surveillance for fiscal and economic decisions don’t diverge and strong incentives remain to maintain or restore solid public finances,” the Bundesbank said in an opinion prepared for a parliamentary budget committee hearing on draft legislation.

The proposed sanction mechanism is “welcomed” because it strengthens the European Commission’s position and makes it harder to water down rules, the Bundesbank said. At the same time, it is “unfortunate” that the strengthened sanction mechanism will only be used when deficit rules are violated, and not if debt thresholds are broken, the institution said.

Direct aid payments by the ESM to euro-region banks wouldn’t be appropriate because “that would lead to an indirect takeover of risks in the case of a sovereign default without corresponding economic and fiscal conditions if the institutes in question held or purchased sovereign bonds on a considerable scale,” the Bundesbank said. “It is of fundamental importance that rescue loans” to member countries “are only awarded with notable interest rate surcharges.”

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