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Wednesday, 23 May 2012

Battle over Euro-bonds is turning into a nasty brawl between the North and the South of Europe

When there is one subject that you could consider ‘controversial’ within the Euro-zone, than it is the Euro-bond.

The Euro-bond is a bond issued by the Euro-zone as a whole. It is issued and traded at a much lower interest rate than sovereigns bonds of certain Euro-zone countries, like Spain, Italy or Portugal could offer, as it is considered a much saver investment.  Individual countries could default within the Euro-zone, but the chance that the whole Euro-zone defaults is succinct.

Wikipedia describes it as follows:

European bonds (or Stability Bonds) are suggested government bonds issued in Euros jointly by the 17 eurozone nations. Eurobonds are debt investments whereby an investor lends a certain amount of money, for a certain amount of time, with a certain interest rate, to the eurozone bloc as a whole, which then forwards the money to individual governments.

The controversy of the Euro-bond lies in the same reason that makes it such a strong financial instrument: it is backed by the financial firepower of all Euro-zone countries (read: Germany). The problem is that a number of (mostly Northern) Euro-zone countries doesn’t want to financially back-up the peripheral Euro-zone countries that made such a mess of their budgets, in the eyes of these Northern countries.

At this very moment the EU is having an informal summit in Brussels and the expectation is that there will be a fierce battle between the proponents and opponents of the Euro-bonds.

The most prominent proponent of the Euro-bond is ‘rookie’ French president François Hollande, while German chancellor Angela Merkel is the most prominent opponent.

Both camps have dug in with their views and are firing upon the other camp through the media.

Today’s Financial Times ( writes on Hollande’s attempt to change the German opinion on the Euro-bond. Here are the pertinent snips of this story:

François Hollande, France’s new president, said on Wednesday that eurozone bonds would lower sovereign debt costs and should be considered as part of a package of swift measures to boost growth and increase liquidity in the eurozone, despite Germany’s refusal to consider the initiative.

Hours ahead of an informal EU summit in Brussels, Mr Hollande was defiant, saying all ideas should be put on the table, paving the way for decisions to be taken at a summit at the end of June.

 “Among my proposals will be eurobonds – not to be in conflict with anyone but...because it would be a pity not to go to the very end.”

He made clear that he was not limiting himself to infrastructure bonds – which Germany does not oppose. “The idea is not just project bonds but to think about ways of financing that would allow countries to access financing at the lowest possible rate of interest and to put an end to speculation and the doubts of the market.”

The Socialist president asked: “Is it acceptable that some sovereigns can borrow at 6 per cent and others at zero in the same monetary union?”

Yields on 10-year Spanish bonds are around 6.1 per cent, while on Wednesday Germany sold €4.6bn of bonds carrying a zero per cent coupon – its first ever offering with no regular return that underscores its safe haven status.

Mr Hollande […]  said that the eurozone crisis owed its longevity in part to flaws in its decision-making mechanism and that it was too narrowly focused on deficits.
Europe needed “vision, direction, employment and a sense of its common future”, otherwise it would fall victim to populism, he said.

The voice of the other side was represented today by Dutch PM under resignation Mark Rutte in Dutch paper Het Financieele Dagblad ( I also print the pertinent snips of this article.

At the beginning of the informal European summit in Brussels, PM (u.resignation) Mark Rutte made perfectly clear that there will not be joint sovereign bonds in the Euro-zone, i.e. Euro-bonds. If necessary, The Netherlands will veto this plan.

“Euro-bonds, we don’t like those at all. This is really something that The Netherlands should stop”, according to Rutte who points at the legal basis for the introduction of Euro-bonds, which requires a unanimous agreement. Also the German chancellor Angela Merkel stated that the EU-treaty doesn’t allow Euro-bonds.

“It doesn’t lead to growth. It leads to our interest starting to rise which isn’t the solution of the current problems”, states Rutte.

The French president François Hollande, however, repeated that the Euro-bonds, as part of a package of growth-stimulating measures for Europe, are under discussion this evening. This evening’s summit is meant as a preliminary meeting to enable decision-making in the eve of next month’s official meeting.

“You are allowed to talk about it. This is a free country, Belgium”, according to Rutte. “What today is all about is growth. This means that country’s budgets need to be tight, the internal market should function well and the labor market is reformed”.

You could say that Rutte is right with these last remarks from a Dutch point of view. However, that is not the point. The point is that the economies of the peripheral European countries and France have been lagging for years. The structural weakness of these economies turns this into a risk for the Euro-zone as a whole.

As the Euro-bonds profit from the financial firepower of the whole Euro-zone, their diminished risk-profile enables much lower interest rates. If the borrowed money would not only be used to pay interest on sovereign bonds and bank loans for the individual country that needs the bond loan, but instead to stimulate the economy of this country, it would give such a country a chance to see the light at the end of the tunnel.

Of course Hollande is right with his remark (see the red text) that it is odd that one country needs to borrow money for 6% and the other country for 0% within the Euro-zone. Not even to mention the amount of interest that Greece needs to pay on a bond loan. Acting together as a team would make the whole Euro-zone stronger, while acting as a bunch of frogs in a wheel-barrow weakens the Euro-zone: also The Netherlands and Germany eventually.

What Rutte and Merkel fear is that the peripheral countries would say ‘thank you’ for the money that the Euro-bonds would supply and would lean backwards, minding their own business. This is naive.

Countries with unemployment rates of 12-25% and youth unemployment rates of 25-50% have no reason to lean backwards. The people in these countries would simply not accept this from their governments anymore. The argument that this money would not instigate growth is absolutely not true per sé; when this money is invested wisely, it could definitely spur growth in these countries.

The big difference between the infrastructure bonds that Germany is in favor of and the Euro-bonds is that the infra-bonds are too narrow in purpose; a good infrastructure does not instigate jobs per sé and besides that, an infrastructure can also be a money pit that sucks up billions without offering added value. 

Who needs another airport, when planes have no need to land somewhere. Who needs roads or waterways when there is no work and no development possibilities in a certain area.

The Euro-bonds offer possibilities to governments to spend the money on where it is needed most. Here is where the EU could have a role: looking to it that the Euro-bond money is not squandered to fill one financial pothole by creating another one. When the Euro-bond is used wisely, in order to stimulate innovation and business activity and thus enable economic growth at areas-in-need, it could be a very good instrument in my opinion.

The peripheral countries, the East-European countries AND France need a kind of perspective. The Euro-bonds could be a start for this perspective. Therefore I praise Hollande for putting his force behind this plan; it is time to end the single focus on austerity and 'getting your budget in order'. When your budget is financially sound, but your economy is down and counted out, than you have still lost everything.

In my opinion, these considerations turn the German and Dutch objects in a display of selfishness and injured innocence. 

Were it not Germany and The Netherlands that profited most from the import surplus of the peripherals and France? 

Is it not The Netherlands that operates like a tax-haven at the expense of other European countries? 

Was it not Germany that introduced a beggar-thy-neighbour policy by going through five years of wage restraint, lowering its costs of labor dramatically?

Were it not the banks from North-West Europe that gave all these loans to the peripheral countries? 

And aren’t it the same banks that had to be saved from these peripheral loans with the almost free money from the ECB?

If I were Merkel or Rutte, I wouldn’t scream so hard about the Euro-bonds. But who am I anyway?!

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