December 6, 2023

Debt in Europe Fuels a Bond Debate

President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany are scheduled to meet in Paris on Tuesday but have vowed to avoid the issue of euro bonds altogether. Nonetheless, a number of analysts say that eventually they may have no choice if they want to keep Europe’s currency union from falling apart.

The euro bond concept is gaining traction among economists and other outside experts like George Soros, the billionaire investor, as a way of preventing borrowing costs for Italy and Spain from rising so much that the countries become insolvent, an event that could destroy the common currency.

Debt issued and backed by all 17 members of the euro zone, euro bond proponents say, would be regarded as ultrasafe by investors and could rival the market for United States Treasury securities. The weaker euro members would benefit from the good standing of countries like Germany or Finland and pay lower interest rates to borrow than if left to face investors on their own.

“It may well be in order to calm markets right now,” said Jakob von Weizsäcker, an economist for the German state of Thuringia who has proposed a way to structure euro bonds so that countries would be encouraged to reduce their debt.

Data released Monday by the European Central Bank underlined how costly it would be to keep Italian and Spanish borrowing costs under control, and added urgency to the euro bond debate. Bond yields on Italian and Spanish debt, which recently rose above 6 percent, have fallen sharply since the central bank said it would start buying the bonds. The yield on Spanish 10-year bonds fell to 4.942 percent Monday, the lowest level in months. Italy’s benchmark yield was just below 5 percent.

But the central bank disclosed that it had spent 22 billion euros($31.8 billion) intervening in bond markets just last week to hold down Spanish and Italian bond yields. That compared with 74 billion euros the bank spent in the previous 15 months, when it focused on the smaller markets for Greek, Portuguese and Irish bonds.

Euro bonds are a deeply controversial idea among both economists and ordinary Europeans. Critics said they would not solve the financial crisis and might create unbearable political tension instead. Voters in stronger countries would balk at assuming the obligations of less prudent members. Some critics argued that euro bonds would unfairly raise borrowing costs for countries like Germany, and, rather than protecting the euro, could lead to the breakup of the currency union.

“Euro bonds could trigger very strong anti-European movements,” said Clemens Fuest, a professor at Oxford. “It would be very hard to sell in Germany.”

The euro bonds debate reflects what is perhaps the central existential question facing Europeans: how much more central government and integration are they willing to accept to save the euro?

In Germany, the answer so far is that euro bonds go too far toward a so-called transfer union where the rich and solvent subsidize the poor. Asked about the issue, Mrs. Merkel’s office said she endorsed a statement by the finance minister, Wolfgang Schäuble, who told the newsmagazine Der Spiegel that he ruled out euro bonds as long as countries pursued their own fiscal policies.

Different interest rates are needed to provide “incentives and sanctions, in order to enforce solid fiscal policy,” Mr. Schäuble told Der Spiegel. “Without such solidity there is no foundation for a common currency.”

Steffen Seibert, a German government spokesman, said Monday that euro bonds were not on the agenda for the meeting between Mr. Sarkozy and Mrs. Merkel. “The German government has said on numerous occasions that it does not believe euro bonds make sense, and that’s why they will not play any role at tomorrow’s meeting,” Mr. Seibert said, according to Reuters.

Article source: