Blog Post

Germany: What about Eurobonds?

While the Federal Government is opposed to the idea of  Eurobonds, the German Council of Economic Experts recommends the establishment of a European Redemption Pact, under which a country could refinance itself through the European Redemption Fund (ERF) up to the point where the debt refinanced reached the current difference between the debt outstanding and […]

By: Date: May 31, 2012 Topic: European Macroeconomics & Governance

While the Federal Government is opposed to the idea of  Eurobonds, the German Council of Economic Experts recommends the establishment of a European Redemption Pact, under which a country could refinance itself through the European Redemption Fund (ERF) up to the point where the debt refinanced reached the current difference between the debt outstanding and the hypothetical debt that would equate 60% of GDP. There appears to be a swing in the debate on ERF and the opposition seems to increasingly demand this in exchange for support on the fiscal compact.

In the official German 2012 Annual Economic Report of the economics ministry both, the federal government and the German Council of Economic Experts reject the idea of Eurobonds. The report, however, mentions the idea of setting up a debt redemption pact proposed by the Council of Economic Experts if the stabilization measures already agreed were to prove inadequate.

This corresponds to official statements  by Wolfgang Schäuble’s or Angela Merkel’s, who underlines notably the incompatibility between the bonds and EU treaties. FDP leader Rainer Brüderle precludes the introduction of Eurobonds in the short or medium run and calls them “Zinssozialismus” (Interest socialism) in an interview with Die Welt. “Savoir-vivre cannot mean that a few have to pay, while the rest enjoy.” In an interview with Le Monde on 25 May 2012, Bundesbank President Jens Weidmann states that “believing Eurobonds would solve the current crisis is an illusion”. “You do not confide your credit card to someone without any possibility to control his expenditures.”  Volker Kauder, Chairman of the Christian Democratic Union/ Christian Social Union (CDU/CSU) parliamentary group in the Bundestag, expresses on the blog of the CDU/CSU on 25 May 2012 his position against Eurobonds.

Apparently, Merkel gets recently support from the opposition on the issue. SPD leader Sigmar Gabriel does not support the creation of commonly guaranteed debt and Grünen leader Jürgen Trittin says that Eurobonds necessitate a modification of the treaties, which is not possible in the short run.

While the Federal Government reaffirms its opposition to the introduction of the European redemption fund (ERF) there seems to be a change in orientation among opposition representatives according to the Frankfurter Allgemeine Zeitung on 24 May 2012. The SPD officially proposes the introduction of ERF and the Grünen approve the idea of the ERF that, according to Trittin, “combines the advantages of low interest rates through common European bonds with debt reductions”. This u-turn is linked to the forthcoming vote on the European Fiscal Pact in June that needs a two-thirds majority in both Bundestag and Bundesrat. SPD and Grüne require the introduction of ERF as one condition for their approval of the Fiscal Pact. Trittin told Reuters that the Chancellor “has to modify her financial and economic Policy if she wants to have the Fiscal Pact ratified.” Moreover, “she has to give up her blockade to ERF.”  According to Gabriel the Federal Government is “still opposed” to the proposal of ERF, which represent for him a good alternative to Eurobonds by reason of clearer conditions.

According to Reuters the next council between the coalition and opposition will be held on 13 June. The Federal Government will until then work out the propositions of the SPD and Grüne including the introduction of the ERF.

Bloggers and commentators often oppose the idea of Eurobonds.  Thomas Hanke states in the Handelsblatt on 29 May 2012 (subscribed version) that Eurobonds are certainly not an instrument to achieve more growth in the next months in Europe, Wolfram Weimer in the Handelsblatt argues that Eurobonds constitute nothing other than the socialization of national debt at the expense of Germany and  Günter K.V. Vetter on Karpfenteich supports Angela Merkel in her opposition to Eurobonds.

Others have a more differentiated view on this. Claus Hulverscheidt in the Süddeutsche Zeitung on 24 May 2012 quotes Brüderle saying that introducing Eurobonds now would be the same as “giving whiskey to an alcoholic”, but that their introduction may be possible in the long run. Brüderle’s statement is surprising given that the FDP considered until now the Eurobonds as absolute taboo, even in the long run. Hulverscheidt agrees with Brüderle, that Eurobonds have to be the final step of the European integration process. Merkel should send this signal to her European partners.

Wolfgang Münchau writes on 23 May 2012 in the Spiegel that the SPD do not have the courage to claim “real” Eurobonds and misses by that a opportunity to advance in the European integration due to a “lack of killer instinct”. 

André Kühnlenz writes on 24 May 2012 in the Financial Times Deutschland that Eurobonds may help to stop the exodus of capital that is currently escalating in Spain and Italy. He agrees basically with the idea of the Bundesbank that we need a fiscal union before the introduction of Eurobonds, but, he thinks that there is not enough time and a solution is needed until the summer in order to preserve the euro. He refers to Yanis Varoufakis, who envisaged in his paper a type of Eurobonds that could be introduced without changing the EU treaties.  According to Kühnlenz, it is clear that the Euro zone will not settle its current problems without Eurobonds. If Europe still wants to play a role in the world, it must jump over its own shadow.

Kantoos finds Varoufakis’ proposal of ECB bonds less convincing. The latter involves the ECB issuing bonds on the member states’ behalf, having the states pay off their debt at the ECB, and having the EFSF/ESM guarantee the losses of the ECB “in the remote case that some members do not redeem their bonds in the distant future.”Sure, ECB bonds would probably have German rates, which would be fair. However, it is not clear who would stand behind these ECB bonds – either the (recapitalized) ECB, or the insurance by the EFSF/ ESM. Thus, in the end, the other European governments would have to pay. Moreover, issuing ECB bonds would increase the yields on other bonds. Therefore, he does not consider the ECB bonds as a real alternative and thinks that they are very close to the commonly proposed Eurobonds.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Upcoming Event

Feb
27
12:30

Bruegel - Financial Times Forum: The future of euro-area governance

The third event in the Bruegel - Financial Times Forum series will look into the future of euro-area governance.

Speakers: Maria Demertzis, Gideon Rachman, Manfred Weber and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event

Upcoming Event

Mar
1
12:30

(How) could European safe assets be constructed?

At this event, we are pleased to host Philip Lane, the Governor of the Central Bank of Ireland, who will present the outcome of the ESRB task force’s investigation on safe assets that he chaired.

Speakers: Levin Holle, Philip Lane, Anne A. Leclercq and Guntram B. Wolff Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

The exchange rate and inflation in the euro-area: words following facts

The reduced references in the speeches of the President and Vice-president of the ECB to exchange rate changes in assessing inflation developments correspond to a decreased pass-through from the exchange rate to inflation. So, as it should be, words have followed facts

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: February 16, 2018
Read article Download PDF More on this topic

Policy Contribution

Tales from a crisis: diverging narratives of the euro area

Who gets the blame for the crisis? How did narratives of the crisis develop since 2007? The authors of this paper tried to identify the key crisis-related topics in articles from four opinion-forming newspapers in the largest euro-area countries.

By: Henrik Müller, Giuseppe Porcaro and Gerret von Nordheim Topic: European Macroeconomics & Governance Date: February 15, 2018
Read article More on this topic More by this author

Blog Post

Trust in the EU? The key obstacle to reform

The challenges that Europe faces both from within and from outside require immediate, concerted counter-efforts. While efforts to advance the European economic architecture are desirable and useful, can Europe realistically attempt to integrate further on the basis of such little trust?

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: February 9, 2018
Read article More on this topic More by this author

Podcast

Podcast

What the German coalition agreement means for Europe

The final document on the German coalition agreement will have significant consequences for the European Union and the Eurozone. Bruegel director Guntram Wolff gives his assessment of the agreement's key features in this episode of 'The Sound of Economics'

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: February 7, 2018
Read article More on this topic More by this author

Blog Post

What is the financial balance of EU membership for central Europe?

EU membership led to major financial and economic advantages to central European Member States, partly by encouraging foreign investment. Widespread foreign ownership of capital brought many benefits but also resulted in large profits. Since central European governments are doing their utmost to attract even more foreign capital, foreign profit is set to increase further.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: February 6, 2018
Read article More on this topic More by this author

Podcast

Podcast

European Parliament: More representative post-Brexit?

Bruegel director Guntram Wolff features in this episode of 'The Sound of Economics', highlighting how a reallocation of seats in the European Parliament following Brexit provides the opportunity to make the institution more representative of EU citizens.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: February 5, 2018
Read article More on this topic More by this author

Blog Post

Difficulties and opportunities in reallocating European Parliament seats after Brexit

The European Parliament must carefully consider the reallocation of seats after Brexit, allowing for a potential shift in political alignment and working within parameters already agreed with Member States.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: February 5, 2018
Read about event More on this topic

Past Event

Past Event

Europe’s immigration and integration challenges: Financial and labour market dimensions

The event, organised by Bruegel in cooperation with the Institute for International Affairs will discuss these and related questions and will also feature the launch in Rome of the study authored by Zsolt Darvas on the impact and integration of migrants in the European Union.

Speakers: Roberto Ciciani, Zsolt Darvas, Marcela Escobari, Tatiana Esposito, Manjula M. Luthria, Carlo Monticelli, James Politi and Nathalie Tocci Topic: European Macroeconomics & Governance Location: Banca Monte dei Paschi di Siena, Via Mighetti 30/A, Rome, Italy Date: February 2, 2018
Read article More on this topic More by this author

Opinion

Your job description, Mr. Centeno

Here’s how you run the Eurogroup.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: January 30, 2018
Read about event More on this topic

Past Event

Past Event

Why think tanks matter in the era of digital and political disruptions

Bruegel is pleased to host this panel discussion as part of the global launch of the 2018 Global Go To Think Tank Index, published by the University of Pennsylvania’s Think Tanks and Civil Societies Program.

Speakers: Matt Dann, Shada Islam and Hlib Vyshlinsky Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 30, 2018
Load more posts