German opposition rows back on bonds
Germany's opposition Social Democrats (SPD) scaled back its support for proposals to ease weaker euro zone states' financing costs, saying the common bonds championed by France were not a near-term option for tackling Europe's debt crisis.
The party was previously a keen advocate of joint debt issuance by euro zone states but would have a tough task persuading voters in next year's federal election to endorse an instrument that many Germans fear would push up their own, currently rock-bottom, borrowing costs.
"Eurobonds are something that for legal reasons in Germany cannot be introduced overnight," SPD chairman Sigmar Gabriel told German radio today, making clear they were off his agenda.
Socialist French president Francois Hollande, whose victory in this month's election has delighted and emboldened the SPD, has irked German Chancellor Angela Merkel by reviving an idea she has been steadfast in opposing.
Dr Merkel's centre-right Christian Democrats, whom the SPD hope to unseat next year, fear euro bonds, a form of pooled debt-raising, would reduce incentives for Greece and other weaker euro zone states to reform their economies.
Mr Gabriel's change of tack on euro bonds comes as his party scents the possibility of regaining power next year following an election win in Germany's most populous state, North Rhine-Westphalia, and the erosion of Dr Merkel's lead in opinion polls.
Mr Gabriel, who is pressing Dr Merkel to back growth-boosting measures to offset an austerity drive in Europe he says is exacerbating the crisis, said the SPD backed what he called 'a sub-form' of euro bond, known as a European redemption fund.
This idea, proposed by Germany's Council of Economic Experts but rejected by Dr Merkel, would involve EU countries with debt above a threshold of 60 percent of national output making a one-off transfer of the excess to the new fund, where it would be jointly and severally guaranteed by the whole euro zone.
The fund would issue bonds to refinance the excess debt at a lower cost than the participating governments have to pay now.
The debt should be paid down within about 25 years, an idea attractive to Germany because it makes the whole scheme relatively limited in time rather than indefinite.
"This is something that other EU countries also find makes sense," said Mr Gabriel.
A member of the Council of Economic Experts, known as the wise men, reaffirmed the benefits of a redemption fund.
"It's a compromise solution that helps... countries like Italy to get funding at low interest rates which is independent of markets," Peter Bofinger said today.
The European Commission, the EU's executive arm, has submitted several options for mutualising euro zone debt, including what it calls "stability bonds" that would replace all nationally issued debt.
Last year, the SPD and the Greens, its likely partner in any future centre-left German coalition, argued that full-blown euro bonds were the best way to defuse the sovereign debt crisis, slash borrowing costs for ailing states and restoring market trust in the common currency.
Despite misgivings, Dr Merkel has not shut the door completely on the European redemption fund option to tackle the crisis.
"We have already said that the government sees legal problems with this and that these problems are being checked," government spokesman Steffen Seibert said on today.