March 8, 2021

German Leaders Reiterate Opposition to Euro Bonds

FRANKFURT — German leaders on Sunday reiterated their opposition to issuing bonds backed by all euro zone countries, with Chancellor Angela Merkel saying that so-called euro bonds would be an option only in the distant future, while her finance minister said that common debt would make it easier for governments to avoid pursuing responsible fiscal policies.

“It will not be possible to solve the current crisis with euro bonds,” Mrs. Merkel told ZDF television.

The German finance minister, Wolfgang Schäuble, said it would take too long for countries in the euro zone to amend the treaty on monetary union, which would probably be required to allow the bonds. “We have to solve the crisis within the existing treaty,” he told the newspaper Welt am Sonntag.

Mr. Schäuble also spoke out against euro bonds during an appearance Sunday in Berlin, Reuters reported, saying that the threat of higher interest rates was necessary to impose budgetary discipline on the nations using the euro currency.

With nervous financial markets likely to face another turbulent week, the comments by Mrs. Merkel and Mr. Schäuble could reinforce perceptions that European leaders remain reluctant to act more forcefully to address the sovereign debt crisis. If so, the European Central Bank could find it more difficult to hold down yields on Italian and Spanish debt, and keep borrowing costs for those countries from reaching dangerous levels.

France and Germany have made it clear that they do not see euro bonds as the solution to rising borrowing costs for countries like Spain and Italy, Frank Engels, an analyst at Barclays Capital in Frankfurt, said in a note.

So far the central bank’s bond market intervention, which began two weeks ago, has kept Italian and Spanish yields below 5 percent, Mr. Engels wrote. In October, the European Financial Stability Facility, the European Union’s bailout fund, will be able to buy government bonds. But that may not be enough to keep yields within bounds, he said.

“Are these backstop facilities sustainable? We have our doubts, as the E.C.B.’s stamina is probably limited and the E.F.S.F.’s balance sheet is capped,” Mr. Engels wrote.

Mr. Schäuble told Die Welt that he did not think it would be necessary to increase the size of the bailout fund. Such comments may come as a particular disappointment to investors because Mr. Schäuble is regarded as one of the most pro-European members of the German cabinet, and among the most willing to agree to national sacrifice in the interest of saving the common currency.

He said that he personally would be willing to cede some control over fiscal policy to a European finance minister, as Jean-Claude Trichet, the president of the European Central Bank, has proposed. But Mr. Schäuble added, “We can only go as fast and as far as we can convince citizens and their representatives in Parliament.”

Separately, Der Spiegel magazine reported that the German finance ministry had calculated that euro bonds would cost Germany an additional 2.5 billion euros or $3.6 billion in interest payments in the first year of issuance, and as much as 10 times that sum each year after a decade. Germany’s borrowing costs are typically among the lowest in the world, but could rise if the nation’s reputation for fiscal prudence was diluted by closer association with countries like Italy.

A finance ministry spokesman said he could not confirm the Spiegel report, which the magazine said was based on estimates by unidentified ministry experts.

Opposition to euro bonds is strong within German political circles and among the country’s conservative economics establishment because of the perception that the country would wind up subsidizing its neighbors.

However, some economists argue that euro bonds would be cheaper even for Germany, because the volume of the bond market would rival the market for United States Treasuries and promote the euro as a reserve currency. That would increase demand for the bonds and lower interest rates.

There is some support for euro bonds in Germany. Leaders of the opposition Social Democrats and Green Party have spoken in favor of common European debt. In addition, the Frankfurt Allgemeine newspaper on Sunday quoted several members of Mrs. Merkel’s governing coalition in Parliament as saying that Germany should not rule out euro bonds forever.

While rejecting the bonds, Mr. Schäuble said that Germany would defend the euro “under all circumstances” and that the government categorically rejected suggestions that Greece should leave the euro zone, as some economists have proposed.

If Greece dropped out, he said, Europe would suffer “a dramatic loss of trust and influence.”

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