Eurobonds plan by no means a panacea

ANALYSIS:Berlin still unconvinced and vital treaty changes will make it unpalatable to states like Ireland, writes ARTHUR BEESLEY,European Correspondent

NEWS THAT the EU Commission will soon propose the introduction of eurobonds helped lift stocks and the euro, but the initiative is fraught with political difficulty. Whether Europe is ready to go down that road any time soon is still in question.

Germany remains opposed, and other wealthy countries have plenty reason for scepticism about a plan in which they would underwrite the debts of others.

That is what eurobonds would involve: a collective, centralised euro zone guarantee on debt drawn down by individual member states.

If every other move to tackle the chaos has proved a serious political challenge for EU leaders, this is a far more challenging proposition than most. The plan would, after all, make permanent a similar kind of support to that seen in each of Europe’s three existing bailouts.

Within the present hurricane in bond markets, however, such an endeavour would take pressure off the weakest member states by enabling them to take advantage of their partners’ strength. In a flash, the struggling states would see their funding difficulties dissipate as the market took reassurance from the common guarantee. The crisis might simply fade away.

But that is a blinkered, idealistic outlook. The solution to a crisis so complex will not be as simple as that.

For one thing, the wealthiest countries would see their borrowing costs rise as a consequence of the increased risk they bear.

That is a very big ask, given the strain on their own public finances and the rising power of anti-EU politicians across a swathe of Europe.

Furthermore, any pressure they impose on their weaker partners to ensure good fiscal behaviour could be characterised as an improper intrusion on their internal affairs.

There would be no nice way of looking over the shoulders of the stragglers but no way of avoiding it either. Intrusive powers for an external authority to compel wayward governments to toe a safe fiscal line would be a prerequisite, but would that prove acceptable on the ground? The seepage of sovereignty would be huge.

Addressing MEPs in Strasbourg yesterday, commission chief José Manuel Barroso warned that his imminent proposal would not herald an immediate solution to the crisis roiling the single currency. That is true: dozens of critical questions remain to be settled.

The great surprise, indeed, was that the markets responded in such positive terms. It was already well known that the commission had been working on a paper setting out options for a eurobond; and Barroso did nothing to settle any of the tensions which are raised by the notion.

Step back a little, however, and a discreet choreography may be discerned. As the commission beats the eurobond drum, Germany pushes for changes to the EU treaties to set in stone tough new powers to enforce EU budget rules. The eurobond is thus seen as the quid for the quo of treaty change. Whether Berlin is amenable will soon be seen.

That might be wishful thinking as of yet, but the commission sees a political moment right now to push in this direction. Given the force of the crisis – with French banks sliding and Italy under shellfire – there is no telling how things might evolve in the coming days.

What is clear is that leaders will have to intensify their response radically if they are to keep good on their promise to avert a Greek default and keep the country within the euro zone.

Still, it is the very case of Greece which illustrates just how difficult it is to ensure fiscal discipline in an errant country. If Athens cannot be relied upon to do what it needs to do within the brutal and humiliating strictures of a bailout programme, what is the hope of good behaviour within a eurobond system used when there is no emergency?

This is where treaty change comes in. The present budget rules are strict enough but flimsy enforcement laid the groundwork for the eruption of crisis once the true state of Greece’s finances became clear.

Although new legislation to toughen the regime is in the works, Germany is pushing for a much more rigorous system with stronger enforcement powers set out within the framework of the treaties. The thinking here – which is still to be tested thoroughly – is that treaty-based rules would remove political discretion from fiscal surveillance, ensuring the system works.

But here is the conundrum: in the same way that eurobonds are a no-no in Berlin, treaty change is still a no-go area for many other member states. These include places like Ireland, where the rejection first time around of the Nice and Lisbon treaties bodes ill for any new referendum.

One won’t come without the other, but the asking price may prove too high on either side. A eurobond system would take years to bed down; the crisis which grows worse by the day demands a more immediate response.