France and Germany have ensured that this week’s European Council will not debate the Juncker-Tremonti plan for addressing the current euro crisis by covering part of existing sovereign debt by issuing eurobonds. Nevertheless rumours of the plan’s death are premature overstated. France and Germany know well that something along the JT plan is unavoidable, if the euro is to survive the slings and arrows of the present crisis. Their refusal to discuss it this week simply means that the backroom discussions have not progressed sufficiently as yet. Ministers and their bosses will have to spend another few days barking up the wrong trees while their minions are talking serious business.
The JT plan was met with ritual admonitions of the notion of pooled debt. It was dismissed as an exercise in stoking the flames of moral hazard which would encourage the fiscally irresponsible to imagine that their sins have been pardoned and their debts paid by others. This is, of course, nothing short of rubbish: The JT plan neither excuses the member states’ fiscal ‘irresponsibility’ nor does it increase Germany’s exposure to the PIGS’ sovereign debts (at least not more so than the current EFSF ineffective arrangement does, not to mention the ECB’s never ending liquidity injections into, largely, insolvent banks). Once Mrs Merkel and President Sarkozy come to terms with the inconvenient fact that the eurozone faces a Lehman’s moment (unless the solvency of the weaker eurozone members is addressed by means of some politically and institutionally inspired overall debt reduction), the JT plan, or something of the sort, will be back on the table. It may be called something else, but it will, undoubtedly, be back.
My concern with the JT plan is that it is not bold enough. In effect, it scores a good, yet less than perfect, grade in one of the three areas that matter: the future structure of eurozone sovereign debt. The idea of splitting up a member-state’s debt in two tranches, one that is transferred to the ECB and another that remains with the member-state’s Treasury is common sense and a major step forward. It is, indeed, what we (amongst others – see here) have recommended in our Modest Proposal. There are, however, two main differences between the latter and the JT plan. First, Juncker and Tremonti are more cautious (possibly in order to curry more favour with Berlin) when suggesting that debt equivalent to only 40% of a member-state’s GDP, as opposed to the Maastricht-inspired 60% in our proposal, is transferred to the ECB. Secondly, Juncker and Tremonti seem to be suggesting (see also Gavyn Davies’ interpretation) that the eurobonds be guaranteed by eurozone members in proportion to their GDP (as are the bonds currently issued by the EFSF). This would be silly. If the ECB issues them, the ECB should back them to the hilt. Just like the US Treasury backs its bills, without reference to California or Ohio and the relative weight of each state’s responsibility for covering US Treasury Bills, so should the ECB back up its own eurobonds. In short, the eurobonds ought to be the ECB’s liability. End of story.
Of course, in the grander scheme of things, these two differences between our Modest Proposal and the JT plan, though important, are rather trivial. Where the two differ significantly is in the two further recommendations that are missing from the JT plan but are important pillars of the Modest Proposal. These are: (A) The proposal of a Tripartite Grand Agreement (between the ECB, the fiscally pressurised member-states and Europe’s banks) for reducing the existing sum of European sovereign debt and of bad bank loans, and (B) the proposal of using the issue of eurobonds in order to energise the European Investment Bank and thus turn it immediately into an engine of growth that will deal the final stroke against the debt crisis (by shrinking once and for all Europe’s debt burden as a proportion of Europe’s GDP). It is our fear that, without (A) and (B), a debate that exhausts all of Europe’s political capital and energy on the question of eurobonds will, in the end, backfire as it may prove inadequate for dealing with the unfolding crisis. If that happens, the vested interests which will have opposed the issue of eurobonds will be heartened and make an undeserved triumphant comeback which will, then, surely spell the end of a united Europe.
In conclusion, while the JT plan is enormously helpful, in that it is stimulates the debate we had to have, the Modest Proposal continues to point to a more viable, and thus more realistic, path out of Europe’s current cul de sac.