On Euro Bonds, Europe’s Politicians Lag Behind the Market: View
That would pretty much make them the only Europeans not talking about the financial instrument that could rescue Europe from its growing debt crisis.
Since the idea was first seriously floated more than a year ago, euro bonds have won considerable support. These securities would be jointly issued and guaranteed by all 17 countries using the common currency, replacing all or some of the individual countries’ debts. We agree with the market players -- investors, economists, business groups, traders -- who see euro bonds as the best way to end the continent’s debt woes. Now the politicians need to come aboard.
It’s understandable why Merkel and Sarkozy might resist. Euro bonds would violate a central tenet of the currency bloc: Each country is responsible for its own finances. The debate also highlights the power struggle between Brussels and the national capitals. Until now, more power has resided with the national leaders. The birth of euro bonds would require a new, region-wide fiscal authority with the ability to influence taxing and spending; the creation of such an entity would reshape the political landscape at a stroke.
These are important considerations, but they are outweighed by the risks of further timidity. The crisis has already spread from the tiny economies of Greece and Portugal to the heavyweights of Italy and Spain. A July 21 euro-area agreement to bolster the region’s rescue vehicle, the European Financial Stability Facility, failed to calm markets. Now even France is seen as vulnerable. The longer Merkel and Sarkozy shy away from big steps, the more expensive it will become to rescue the euro. The euro experiment itself may be at stake, not to mention the global economy.
There is no way here to divorce economics from politics. German opposition to euro bonds remains formidable. Many voters and important figures in Merkel’s governing coalition and cabinet, including Finance Minister Wolfgang Schaeuble, are against the idea. The hostility stems from the high price Germans paid to finance unification in the 1990s. Germans bit the bullet then, and they are hard-pressed to see why the Greeks and others shouldn’t do the same. Merkel’s coalition partners, the Free Democrats, are becoming the German equivalent of the Tea Party with their strong anti-tax, anti-bailout views.
Still, the calculus for Merkel is changing, and she may be better off taking the political risk of backing euro bonds and trying to sell the concept to voters. No country has gained more than Germany from the common currency, helping it sustain an export-powered economy. German exporters drove that point home yesterday by endorsing the euro bond idea.
What’s more, further piecemeal bailouts -- the sure cost of putting off euro bonds -- would only stoke voter anger and jeopardize the dwindling prospects of her Christian Democratic Union in 2013 elections. All six regular opinion polls suggest that the opposition Social Democratic Party and the resurgent Green Party, which both support euro bonds, would win if the election were held today.
The main fear of German taxpayers is that mutual borrowing through euro bonds will push up Germany’s debt costs. It’s not necessarily so: The size of the market would be similar to that for U.S. Treasuries, making euro bonds an attractive asset for investors looking to park money at minimal cost.
This liquidity premium could even lower Germany’s borrowing costs, according to economists at the Brussels-based think-tank Bruegel. And a unified finance ministry could easily exert the control over individual countries’ finances that many in Merkel’s party desire.
Sarkozy, too, should be looking more favorably at euro bonds now that the crisis is at his doorstep. He faces voters in eight months -- and the French economy has stalled out. Slow growth means less tax revenue, higher safety-net expenses and increasing debt costs. French voters seem more sympathetic to a tighter fiscal union, but Sarkozy has refrained from moving too far ahead of Merkel on such a controversial topic.
The best thing Merkel and Sarkozy could do to restore balance in the European economy is get in step with each other - - and then join with their neighbors, both stable and shaky, in creating euro bonds.
To contact the Bloomberg View editorial board: email@example.com.