As euro talks resume, Juncker puts the 'E-bond' on the table

Tue, Dec 7, 2010, 00:00

German support for the issuing of sovereing bonds is crucial, writes Arthur Beesley

BACK TO Brussels. Eight days after an emergency meeting to approve Ireland’s €85 billion bailout by Europe and the IMF, euro zone finance ministers resumed their deliberations last night on the crisis hitting the single currency.

Neither the Minister for Finance Brian Lenihan nor any Irish Minister of State was in attendance as the Government put the finishing touches to what has been billed as the harshest budget for many years. But the debate has moved on already, with attention centred now on Portugal, Spain, Belgium and Italy.

In an unexpected intervention, however, euro group president Jean-Claude Juncker used the platform of the Financial Times opinion page yesterday to make the case for the issuance of sovereign bonds with a common euro zone guarantee. In a piece co-signed with Italian minister Giulio Tremonti, Mr Juncker acknowledged considerable stress on sovereign debt markets and said the development of “E-bonds” would reinforce Europe’s commitment to the single currency.

Mr Juncker has long been an advocate of such an innovation, and it is open to him at any time to put it in private before the group of euro finance ministers. However, the significance of his manoeuvre seems to lie in the very public forum he chose for a renewed push on this front.

The notion is stridently opposed in Germany, but EU leaders are due next week to adopt plans for a permanent bailout fund. Mr Juncker seems to be saying this is an unturned stone in the drive to rekindle confidence in the euro and its beleaguered members.

In doing so there seems to be an implicit message here that efforts already under way are not up to that mountainous task. That also explains the clamour to increase the €750 billion fund, something that Berlin also opposes.

How would E-bonds work?

The basic concept is simple enough, the objective being to make borrowing cheaper for highly-indebted countries. On the flipside, however, borrowing would become more costly for countries such as Germany with top-ranked credit ratings.

Mr Juncker and Mr Tremonti said that jointly-sold securities could cover as much as half of the borrowing of euro area governments.

They would deal with German opposition to subsidies for the fiscally weak – the “fiscal union” that Berlin dreads – by converting the paper of countries with higher budget deficits into E-bonds at a discount.

Economics commissioner extols the intellectual attractions of the idea, but it is non-runner without German support.

And German opposition came quickly yesterday as Chancellor Angela Merkel said the concept was beyond the scope of the current EU treaties.

There was more than a little impatience too when her finance minister Wolfgang Schauble arrived in the Belgian capital to meet his counterparts.

“We should also give the markets time to realise what we are doing, instead of opening the next discussion [as soon as] we make a decision,” he said. “We can’t have a new debate every week.”

Oh yes they can, the kernel of the problem being that nothing done to date has doused the flames.