As the debate on whether the EU should introduce eurobonds to solve the debt crisis sharpens, economists in Berlin argue that pooling Europe’s debt would spell disaster for Germany and the euro. EurActiv.de reports.
The eurobonds debate overshadowed a Franco-German summit on Tuesday (16 August), with a growing body of economists saying the only way to ensure affordable financing for the bloc’s most distressed countries would be for the euro area to pool its debt by issuing joint eurobonds.
Germany’s most prominent economists are taking a stand against the introduction of the instrument, saying it could substantially raise the country’s liabilities in the debt crisis.
“Eurobonds could offer countries some short relief but in the long run they lead to disaster, because they pave the way to even higher debts for everyone,” Ansgar Belke, chief economist at the German Institute for Economic Research (DIW), told EurActiv Germany.
In addition, the EU would have to establish some kind of fiscal police to prevent escalating debts from the common bonds, the economist continued.
Belke is a member of the panel of monetary experts currently advising the European Parliament.
Eurobonds would be used as a last resort when countries cannot finance themselves on capital markets, Thomas Straubhaar from the Hamburg-based economics institute HWWI has also argued.
Belke strongly warned against a so-called “Transfer Union”, whereby richer eurozone countries simply take on the liabilities of their poorer partners in order to help finance them.
However, many observers argue that this has already happened, as the €440 billion European Financial Stability Facility (EFSF) has de facto taken on the debt burdens of Greece, Ireland and shortly Portugal.
And current turbulence on markets indicates that the time for last resorts has in fact arrived, as Spain and Italy’s sovereign debts are being pummelled by speculators and France’s triple AAA credit rating is running the risk of a downgrade.
In a move which compromises the European Central Bank’s independence, the ECB spent a record €22 billion on government debt last week to try to halt the spread of the crisis in both of these countries.
The German economists’ grim prognosis on eurobonds is in agreement with their national government. The country’s finance minister, Wolfgang Schäuble, has repeatedly argued that there will be no eurobonds without a full fiscal union.
His chancellor, Angela Merkel, has said there will be no talk of the bonds until prolonged negotiations on economic governance – common debt ceilings and sanctions – have been finalised.
Olli Rehn, the EU commissioner for economic and monetary affairs, said on Tuesday that he would release a paper and possibly legislation on eurobonds, provided that the European Parliament and France break the current deadlock on economic sanctions for highly-indebted countries.
€47 billion for the German taxpayer?
Eurobonds could cost the German taxpayer up to €47 billion a year, according to figures from another German economic institute, Ifo.
The institute admits that the figure is based on an unprecedented scenario but insists that Germany would bear an even greater fiscal burden than it already does.
“To make taxpayers liable for spending decisions in other countries would run like venom through the European Monetary Union,” Belke warned.
Many view the bonds as a form of discrimination as countries with good accounts would have to pay the same interest rates as those with high debts. Rehn recently promised though that a forthcoming proposal would allow for different interest rates depending on countries’ indebtedness.
Red and blue bonds
A prominent EU economic think-tank, Bruegel, believes it has found the perfect model.
Bruegel has long been campaigning in favour of the bonds and has set out its own model – blue bonds and red bonds – which could see countries bear varying levels of costs in their issuance.
Blue bonds would be used to finance debt to the tune of up to 60% of a country’s GDP. But if countries need aid beyond the prescribed 60% threshold, they would be forced to use red bonds which would be sold at a penalty rate.
Jakob von Weiszäcker, who developed the model for Bruegel, told a German radio station that the German taxpayer is already carrying the majority of other countries’ debts under the banner of the European Financial Stability Facility (EFSF). Contributions to the EFSF are the same as those to the ECB, of which Germany has the greatest share.
“We are already in a Transfer Union whichever way you look at it,” the economist said in a radio interview.