They came. They talked eurobonds. They left in a miff. Why?
Purportedly because Germany, Finland and Holland believe: (a) that eurobonds mean a fiscal transfer from low interest rate countries to high interest rate ones and, therefore, (b) that such a transfer is illegal according to the Lisbon Treaty and the German constitution.
What Germany, Finland and Holland are rejecting is what is known in the trade as jointly and severally guaranteed eurobonds. That is, bonds issued with the backing of all the Eurozone member-states jointly. Under such a scheme, it is indeed true that the German taxpayer will be subsidising the Spanish taxpayer and this would come into conflict with both the Lisbon Treaty and the German Constitution. But even if it did not (or even if the Treaty and the Constitution were amended), it would make little sense, from a macroeconomic viewpoint, to go down the road of this type of eurobond. Why? Because when both Spain and Germany are backing some form of debt (or bond), the interest rate that the common debt will incur will be some weighted average of Spanish and German interest rates. And this in-between interest rate will prove too high for Germany (at least politically) and not low enough (economically) for Spain. The reader may, therefore, be surprised to read that, on this, I am in agreement with Mrs Merkel: jointly and severally guaranteed eurobonds are not the solution.
The tragedy in all this is that our European leaders resemble a group of kids arguing over how to share a cake because no one trusts the other with the knife. As we, adults, know, there are simple solutions to this problem. Similarly with eurobonds. The solution is indeed stupendously simple: No member-state should guarantee them! Period! That’s it! Not Germany, not Holland, not Spain, none of the national governments. Each government can continue issuing its own bonds without guaranteeing one penny (or eurocent) of the new eurobonds. And who will issue and guarantee the eurobonds? The European Central Bank of course.
The idea (which Stuart Holland and I have been canvassing for over the past two years – see Policy 2 of our Modest Proposal) is that the ECB offers to convert the Maastricht-compliant loan of each member-state by operating like a go-between, effectively mediating between the member-state and the international money markets. The ECB services the Maastricht-compliant portion of each maturing bond of participating member-states using funds it raises itself from the money markets. At once, it opens debit accounts for the member-states it is helping out and into which the latter commit to pay back the money which will redeem, in the fullness of time, the ECB-bonds that the ECB issued on their behalf. (See here for a helpful parable.) To create the market confidence necessary for ensuring rock bottom interest rates for the ECB-bonds, the EFSF-ESM could offer insurance cover to the ECB in case one of the member-states fails to pay sufficient funds into its debit account.
Voila! A eurobond scheme that creates a new, liquid market for euro-denominated debt, that alleviates the financing problems of all fiscally-stricken member-states, and which requires no debt guarantees nor fiscal transfers from Germany, Holland or Finland.
So, why do they not opt for this simple solution? For two reasons that they do not dare say out loud.
First, because Germany does not really want interest rate relief for the struggling Periphery. For some reason, which I shall not elaborate on here, Mrs Merkel feels that fiscal waterboarding is what the Periphery needs more of these days.
Secondly, because such a scheme would mean that Germany would lose its capacity to leave the eurozone as a common debt external to the European System of Central Banks will be born by the ECB, thus making it impossible for any member-state to up stumps and leave the euro. Such a loss of its ‘exit card’ (that only Germany truly owns) will reduce the German chancellor’s bargaining power, within the eurozone, inordinately.
And so, Europe’s knickers remain in a knot, while the eurozone is disintegrating fast.