Hollande to push ‘Eurobonds’ debate at EU summit

Hollande Obama.JPG

French President François Hollande said he would promote the idea of mutualised European debt at an informal summit in Brussels this week, increasing pressure on German Chancellor Angela Merkel to drop her opposition to the proposal.

"I will outline all growth proposals at this informal meeting on May 23," Hollande told reporters at the end of a G8 leaders meeting in Camp David on Saturday (19 May).

"Within this packet of proposals there will be Eurobonds and I will not be alone in proposing them. I had confirmation on this at the G8."

Senior EU and US officials said Hollande raised the topic of euro area bonds – bonds jointly underwritten by all eurozone member states – during G8 talks at the weekend and would again push it when EU leaders meet in Brussels on 23 May.

He is expected to have backing from Italian Prime Minister Mario Monti, Spanish Prime Minister Mariano Rajoy and the European Commission, which has long been a backer of euro area bonds, producing a feasibility study on them late last year before the initiative was pushed to the background.

The Brussels meeting is expected to focus on the French president's call for measures to kick start growth across the 27-country bloc, especially in the 17-nation eurozone, while maintaining efforts to cut budget deficits.

Pressure on Merkel

Hollande has said he will press Berlin to lift its veto on issuing common eurozone bonds – debt issued for the whole currency and implicitly guaranteed by countries such as Germany –, or to allow the European Central Bank to lend directly to governments.

Both ideas are "red lines" for the centre-right German government, although Merkel has not ruled out eurozone bonds as a long-term prospect if Europe takes more steps towards a tighter political and fiscal union.

Hollande appeared to have had a political success at the G8 with the leading global industrialised nations, including the United States, Russia and Germany, agreeing to balance austerity with a new dose of US-style stimulus.

"We had a frank discussion on growth, but budgetary commitments are not under question. There's no reason to think any country was isolated," Hollande said when asked if the meeting had marginalised Merkel.

"If we want to move forward we have to do it with everybody that counts in Europe, Germany naturally, but also the rest of the world."

Summit agenda

The rapid deterioration in the eurozone debt crisis over the past month, with Greece's potential exit from the 17-country currency bloc no longer taboo, has brought the idea back to the forefront, with many economists and policymakers arguing it would be one of the best ways of restoring market confidence.

"The Eurobonds debate is back front and centre and Hollande will have support from other leaders if he raises it," one EU official said.

"It's not something that's going to happen overnight – there's a lot that needs to fall into place first – but there is a desire for a plan of action toward Eurobonds."

Proposals at Wednesday's summit are expected to include boosting the paid-in capital of the European Investment Bank and plans for 'project bonds' underwritten by the EU budget to finance infrastructure.

The aim is to agree ideas that can be formally signed off at the next summit on 28-29 June.

Long-term prospect

Merkel has said she is not opposed to jointly underwritten euro area bonds per se, but believes it can only be discussed once the conditions are right, including much closer economic integration and coordination across the eurozone, including on fiscal matters.

That remains a long way off.

In its paper on what it calls "stability bonds", unveiled in November, the Commission said it was not an idea that could be deferred forever, saying the severity of the crisis – which has only worsened since – meant quicker action needed to be taken.

"While common issuance has typically been regarded as a longer-term possibility, the more recent debate has focused on potential near-term benefits as a way to alleviate tension in the sovereign debt market," the paper said.

"In this context, the introduction of Stability Bonds would not come at the end of a process of economic and fiscal convergence, but would come in parallel with further convergence and foster the establishment and implementation of the necessary framework for such convergence."

That is language that Monti, an economist and former European commissioner, has supported in the past and is expected to second in the discussions on Wednesday.

"Whatever the timeframe was before on moving towards Eurobonds, it's now even shorter because of the worsening in the crisis," a second EU official said.

"There needs to be a discussion on jobs and growth, but there also needs to be a discussion on specific steps that can be taken towards Eurobonds.

Several proposals, aside from the Commission's, have already been circulated for well over a year. One, called a debt redemption fund, was proposed by a group of German 'wise men'.

That proposal would involve mutualising the debts of eurozone countries over and above 60% of GDP – the debt limit set out in the EU's stability and growth pact.

Another idea put forward by the Bruegel think tank in Brussels would involve mutualising all debt up to 60% of GDP, with any debt over and above that limit having to be underwritten by the specific country alone.

Economists have argued that the best way of restoring confidence in bonds issued by eurozone sovereigns is for the debt to be collectively underwritten by all the countries. However, that would put a large burden on Germany, the EU's biggest economy, to finance the debts of other member states.

Tackling the banking crisis

As well as resolving the region's debt problems, EU leaders are also expected to discuss how to tackle a deepening banking crisis, with the banking systems in both Greece and Spain under severe strain.

One idea is to allow the European Financial Stability Facility, the eurozone's €700 billion rescue fund, to help recapitalise banks directly, rather than lending to individual countries that then lend it on to the banks.

But Germany opposes direct lending by the EFSF to banks, saying it is up to individual member states to ensure the stability of their banking sectors.

In November 2011, the European Commission presented a Green Paper on the feasibility of Eurobonds listing three options ranging from the ambitious full replacement of national bonds with eurobonds to a less drastic partial substitution without joint guarantees.

The idea of using Eurobonds was first launched by former Commission President Jacques Delors in 1993 as a way to finance the European budget. Another former Commission president, Romano Prodi, backed the idea too. But no agreement has ever been found among member states.

The idea resurfaced as the economic crisis started hitting Europe in 2008. With many member states forced to pay unsustainable yields to refinance their public debt, the concept of low-yield Eurobonds sounded appealing to many.

But not Germany, which pays low yields on its bonds and fears being forced to pay more to issue a eurozone security.

Both former EU Economic Commissioner Joaquín Almunia (now in charge of competition) and his successor Olli Rehn have previously supported the idea in principle, but in the past concluded that it was politically not feasible due to German opposition.

  • 23 May: EU "growth" summit in Brussels
  • 28-29 June: EU summit in Brussels expected to finalise growth agenda.

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