Bruno Waterfield: On Thursday night, Italy and Spain plunged an EU summit into disarray by threatening to block “everything” unless Germany and other eurozone countries backed their demands for help.
…..Under the deal, Spanish banks will be recapitalised directly by allowing a €100 billion EU bailout to [be] transferred off Spain’s balance sheet after the European Central Bank takes over as the single currency’s banking supervisor at the end of the year.
……[and] a pledge to begin purchases of Italian bonds using EU bailout funds to reduce Italy’s borrowing costs with a lighter set of conditions…..
"Which Eurobonds?" by Jeffrey Frankel | Project Syndicate
Jeffrey Frankel: Ever since 1841, the market requires that US states running up questionable levels of debt pay an interest-rate premium to compensate for the default risk. By contrast, Greece and the eurozone’s other heavy borrowers were able to borrow at interest rates that had fallen to virtually the same level as German Bunds. Had the ECB operated from the outset under a rule prohibiting it from accepting SGP-noncompliant countries’ debt as collateral, the entire eurozone sovereign-debt problem might have been avoided….
The version of Eurobonds that might work as the missing long-term enforcement mechanism is almost the reverse of the Germans’ ERF proposal: the “blue bonds” proposed two years ago by Jacques Delpla and Jakob von Weizsäcker. Under this plan, only debt issued by national authorities below the 60%-of-GDP threshold could receive eurozone backing and seniority. When a country issued debt above the threshold, the resulting “red bonds” would lose this status……market interest rates would provide the discipline that bureaucrats in Brussels cannot.
via "Which Eurobonds?" by Jeffrey Frankel | Project Syndicate.
Berlin is ignoring the lessons of the 1930s – FT.com
Germans must understand that bank recapitalisation, European deposit insurance and debt mutualisation are not optional; they are essential to avoid an irreversible disintegration of Europe’s monetary union. If they are still not convinced, they must understand that the costs of a eurozone break-up would be astronomically high – for themselves as much as anyone.
After all, Germany’s prosperity is in large measure a consequence of monetary union. The euro has given German exporters a far more competitive exchange rate than the old Deutschmark would have. And the rest of the eurozone remains the destination for 42 per cent of German exports. Plunging half of that market into a new Depression can hardly be good for Germany.
ECB Expected to Unleash QE Money Printing after Launching of Euro-Bonds :: The Market Oracle
In return for surrendering fiscal policy to Brussels, – Berlin and Paris, the key paymasters of the Euro-zone, would agree to the creation of a common Eurobond that would pool the credit ratings and collateral of all participating Euro-zone countries into a single fixed income instrument. Chancellor Merkel says that German borrowing costs will jump higher because of the creation of a Eurobond, though she is prepared to consider Eurobonds, if the legal framework is in place to ensure all countries in the zone observe the rules.
…..Once fiscal integration is agreed upon, Berlin is expected to agree to the creation of Eurobonds issued by member states that could be purchased in massive quantities (monetized) by the ECB. Countries would be liable for each others’ debts, but the ECB could make much of their debt disappear with its electronic printing press. Eurobonds would either be financed with higher taxes on the working class, through austerity measures, or through the inflationary effects of the ECB’s money printing machine. With French banks alone holding more of their debts than the entire €440-billion European Financial Stabilization Fund, a default by these countries would likely bankrupt the French financial system. Thus, Paris has been pushing hard for the ECB to monetize debt on a massive scale.
The German Hour – Jean Pisani-Ferry – Project Syndicate
Germany should be bold and use its leverage to offer a new contract to its eurozone partners: mutual guarantee of part of their public debt in exchange for strict debt limits and a new legal order in which a eurozone authority can veto an enacted budget even before it is implemented. Only such boldness will deliver the certainty that markets need – and it is Germany’s responsibility to be bold.
via The German Hour – Jean Pisani-Ferry – Project Syndicate.
Fiscal union is the only real solution | Credit Writedowns
A fiscal union led by Germany would in effect force debtor nations who want more German and ECB support to surrender more of their fiscal sovereignty, in a binding way, to EU Commissioners, who would have greater authority in shaping national budgets and fiscal policies.
Rather than ECB bond buying or a common bond issuance being a solution to the problems, those activities are only possible once the solution is in place. Needless to say monetary union was a significant surrender of monetary sovereignty. However, by retaining fiscal sovereignty, countries found an escape hatch. A move to fiscal union is to close this loophole.
via Fiscal union is the only real solution | Credit Writedowns.
Merkel Rejects Rapid Action on the Euro – NYTimes.com
PARIS — Quashing recent speculation of a softening in Germany’s hard-line stance on the euro, Chancellor Angela Merkel repeated on Thursday her firm opposition either to bonds issued jointly by the euro zone countries or to an expansion of the role of the European Central Bank as quick responses to the sovereign debt crisis.
“Nothing has changed in my position,” she said at a news conference…..[but] The German newspaper Bild reported Thursday that the Merkel government was inching towards accepting so-called eurobonds, at least in some form, even if the public stance remained against them, and that some of her party said they could be a tradeoff for treaty changes.
via Merkel Rejects Rapid Action on the Euro – NYTimes.com.
Colin Twiggs: ~ I am getting a sense that Angela Merkel already knows the outcome. As a consummate negotiator she is using the debt crisis to force her EU colleagues to make concessions that in normal times would be politically unthinkable. Germany does not want to abandon the euro which has served them well over the last two decades. They also does not want to risk inflation — so an ECB solution is ruled out. But euro-bonds may be acceptable to the German public — provided that there are strict controls throughout the EMU to ensure fiscal discipline. That, I suspect, is her desired outcome — she just has to make her EU counterparts feel the heat long enough that they fully appreciate the concessions she makes — and do not start back-tracking on their commitments.
EUROPA – Press Releases – New action for growth, governance and stability
Extract from Press release regarding European Commission proposal for a common euro-zone bond market and tighter budgetary controls for members:
The proposed Regulation strengthening surveillance of budgetary policies in euro area Member States would require these countries to present their draft budgets at the same time each year and give the Commission the right to assess and, if necessary, issue an opinion on them. The Commission could request that these drafts be revised, should it consider them to be seriously non-compliant with the policy obligations laid down in the Stability and Growth Pact. All of this would be done publicly to ensure full transparency. The Regulation also proposes closer monitoring and reporting requirements for euro area countries in Excessive Deficit Procedure, to apply on an ongoing basis throughout the budgetary cycle. And euro area Member States would be required to have in place independent fiscal councils and to base their budgets on independent forecasts.
The proposed Regulation strengthening economic and fiscal surveillance of euro area countries facing or threatened with serious financial instability would ensure that the surveillance of these Member States under a financial assistance programme, or facing a serious threat of financial instability, is robust, follows clear procedures and is embedded in EU law. The Commission would be able to decide whether a Member State experiencing severe difficulties with regard to its financial stability should be subject to enhanced surveillance. The Council would be able to issue a recommendation to such Member States to request financial assistance.
The Green Paper on Stability Bonds analyses the potential benefits and challenges of three approaches to the joint issuance of debt in the euro area. The paper sets out the likely effects of each of these approaches on Member States’ funding costs, European financial integration, financial market stability and the global attractiveness of EU financial markets. It also considers the risks of moral hazard posed by each approach, as well as its implications in terms of Treaty change. Stability Bonds are seen by some as a potentially highly effective long-term response to the sovereign debt crisis, while others are concerned that they would remove the market incentive for fiscal discipline and encourage moral hazard. The Commission makes clear that any move towards introducing Stability Bonds would only be feasible and desirable if there were a simultaneous strengthening of budgetary discipline. The extent of this strengthening needs to be commensurate with the ambition of the approach chosen.
via EUROPA – Press Releases – New action for growth, governance and stability.
EU Sets Out Proposal on Euro-Zone Bonds – WSJ.com
BRUSSELS—The European Commission proposed Wednesday significantly tighter controls over euro-zone members’ budgets, alongside options for a common euro-zone bond market.
….The commission said the deteriorating economic climate requires greater reform efforts from member states.
If a government doesn’t comply with the EU’s demands, they could be locked out of European Union budget funding, which can amount to billions of euros a year.
….The proposals are designed to strengthen the way the euro zone is governed and they go as far as the Commission has said it can go without changing the European Union treaty. Closer integration would set the groundwork for issuing joint bonds among the euro currency’s 17 governments.
Europe’s Punishment Union – Ambrose Evans-Pritchard
As Sir John Major wrote this morning in the FT, this does not solve EMU’s fundamental problem, which is the 30pc gap in competitiveness between North and South, and Germany’s colossal intra-EMU trade surplus at the expense of Club Med deficit states.
It is therefore unlikely to succeed. It means that Italy, Spain, Portugal, et al must close the gap with Germany by austerity alone, risking a Fisherite debt deflation spiral. As I have written many times, this is a destructive and intellectually incoherent policy, akin to the 1930s Gold Standard. It risks conjuring the very demons that Mrs Merkel warns against.
Sir John is less categorical, but the message is the same. Europe will have to evolve into a fiscal union to make the system work….