Brussels, 23/11/2011 (Agence Europe) - The European Commission has put forward three options for pooling eurozone debt in a Green Paper unveiled on Wednesday 23 November. “By putting forward three options for such stability bonds and providing a detailed analysis of their financial and legal implications, the Commission is framing this debate, as well as setting out a clear timeline for the next steps.” He said that eurobonds would have the huge benefit of creating a much wider, more liquid bond market, like for the US Treasury Bonds. EU Economic and Monetary Affairs Commissioner Olli Rehn said: “The two key findings are: (1) Yes, jointly issued stability bonds would likely produce substantial benefits in terms of reducing and stabilising member states borrowing costs, better shock resilience of the financial sector and improved market efficiency over time. (2) But as common bonds would reduce market discipline, their introduction would only be meaningful on the condition that euro area economic governance were to be substantially further strengthened.” He added: “These two first approaches would also most probably require amendment to the Treaty. This could require considerable time” (see separate article).
The Green Paper is very explicit in this connection. For all types of stability bonds, there would be a substantial increase in surveillance and budget coordination so avoid any moral hazard. The document distinguishes between three basic approaches for pooling debt in the eurozone: A full replacement of national bonds by common bonds with joint and several guarantees; or a partial replacement of national bonds by common bonds with joint and several guarantees (for example the section of the debt over and above 60% of GDP) or a partial replacement of national bonds by common bonds with several (but not joint) guarantees. (Joint-and-several guarantee means that a creditor can turn to each guarantor for the whole amount, while a several guarantee means that each guarantor is only responsible for a pro-rata amount.)
The first two options would give the holders of stability bonds the right to demand the reimbursement of their investment from all eurozone countries that are guarantors and would hugely cut the costs for struggling economies wanting to borrow money, but they would require a serious leap forward in terms of political integration, requiring changes to the EU institutional set-up (which would take some time to introduce). “The approach based on joint and several guarantees would give the greatest benefits, but would also require the most far-reaching reforms of governance to ensure that fiscal prudence prevails”, explained Rehn. The Commission is also examining a mechanism to prevent the highest rated countries from having to pay more to roll over their own debt. The third option is the least risky for top-rated countries like Germany and Finland, which can currently borrow cash at very low interest rates. It would not take long to introduce, but would not reduce borrowing costs for struggling economies to such a high degree.
Asked whether he was trying to isolate Germany, which is strongly opposed to the eurobond idea, Barroso said: “The European Commission has the right and the duty to produce to sensible rational analysis on issues that are important for debate”, and the suggestion was totally misplaced. He described Germany's objections as “comments mostly about timing, with no opposition of principle.” All the same, the biggest eurozone economy will take some convincing. Perhaps the lack of enthusiasm on Wednesday among investors for the latest issuance of German bonds (only taking up €3.6 billion of the €6 billion for sale) will change matters.
EP. The report on stability funds is the European Commission's answer to constant demands from the European Parliament. Welcoming the research, the EPP Group said it would express its views on each of the options. S&D leader Martin Schultz said: “When the house is on fire, you need the fire brigade in a hurry … not a discussion on what your options might be.” He agrees with the idea of eurobonds and wants the ECB to send out a strong signal about its willingness to intervene to restore confidence. Praising the Commission's leadership, the Liberals approve of its idea of building on the debt pooling mechanisms put forward by economic advisors to the German government (see EUROPE 10500). “Eurobonds can play an essential role in fostering financial stability in Europe. They can produce incentives for member states to respect fiscal discipline and at the same time free resources to invest in growth enhancing measures. Hence they can as well be a key instrument to exit the current crisis”, said Sylvie Goulard (ALDE, France). Favouring stability bonds, Philippe Lamberts (Greens/EFA) regretted the slow progress saying there was no time left to beat about the bush, and demanding that the Commission use its power of initiative to publish legislation if the European Council next month refuses to give it a mandate to this effect. (MB/transl.fl)