Writing in the Financial Times this morning, Wolfgang Munchau discusses whether a giant eurobond (jointly and severally guaranteed by every Eurozone member) could be a solution to the currency union’s woes. He thinks it might, and he could be right (at least for a while: the zone’s key underlying structural problem would remain: one size would still not fit all), but he’s quite correct to stress that the time it might take to put such an instrument together could be lethal.
Here’s a key extract::
Imagine Germany, the Netherlands or Finland being asked to sign off on a eurobond tomorrow. Last week, Angela Merkel, German chancellor, ruled it out every day. Mark Rutte, Dutch prime minister, said it would require a fiscal union. Jyrki Katainen, Finnish premier, is also opposed but expects the issue to come in autumn. Wolfgang Schäuble, German finance minister, said a fully-fledged political union would be a prerequisite for a eurobond – another way of saying no. Are they all bluffing? Only up to a point. I know that observers have become cynical, in particular about Ms Merkel’s public expression of resistance. She has opposed every crisis measure, from the first Greek loan to the extension of the EFSF’s mandate, only to yield ground later. Is the eurobond not merely the next stage in this game of early denial and ultimate surrender? Will she not soften her tone once the Bundestag agrees the changes to the EFSF? I know there are people close to Ms Merkel and Mr Schäuble who agree that a eurobond will be the only solution to this crisis. I would not be surprised if they had even drawn up an emergency plan. But the politics is holding them back. Ms Merkel has a tough battle on her hands to secure a parliamentary majority for the extension of the EFSF. She will probably win it, but she might not win a fight over a eurobond. Her coalition would probably break up.
So, while I cannot see how Greece or Italy can remain in the eurozone indefinitely without a eurobond, I find it equally hard to see Germany, Finland and the Netherlands agreeing to it. So something will have to give. A small eurobond, covering only a small percentage of sovereign debt, looks a tempting fudge. But it would not solve the crisis. Perhaps a Social Democrat-led German government would accept eurobonds after elections scheduled for 2013. But that would be too late. Perhaps the next stage of the crisis will be so severe that everybody grows scared enough to accept it as a lesser evil. That might work, but it is not a scenario you would wish for.
The only small consolation in the short term is the European Central Bank’s extended bond-purchasing programme, which now runs to well over €100bn. I understand several members of the ECB’s council have voted against. This means the consensus is fragile, and may not be sustained for ever.
The dual uncertainty over the eurobonds and the ECB’s bond-purchasing programme suggests that investors are perfectly rational in betting against the eurozone. This means the crisis will go on, and that it will get worse and more expensive. And unless there is a dramatic reversal in the political response very soon, even a eurozone bond might not work.