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Friday, 25 May 2012

Euro-Bonds and Pandora’s Box – The Euro is not enough


These days, the whole world is looking to Brussels, again. While it only seems a matter of time for Greece to drop out of the Euro-Zone, the EU leaders try – one more time – to prevent a total monetary collapse of Greece. The Euro-Bonds, a common European bond with shared costs and obligations covered by all EU member states, shall guarantee a burden sharing for the rescue of Greece and the other Euro-states in crisis. This system was already designed since the very beginning of the Greek debt crisis

However, you can always count on Germany to oppose the Euro-Bonds. Common costs sharing would mean that the EU member states with the highest GDP performance will take the biggest burden. Also, Greece’s debts will be distributed among all member states, which would be helpful for Greece.

The reason why Germany and chancellor Merkel are so reluctant towards the Euro-Bonds, aside from the redistribution of the debts, is a simple one: the current legal EU regime of the Treaty of the European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU) does not mention any kind of Euro-Bonds or similar construct. Therefore, the conclusion is obvious: if it’s not in the treaties, then it’s not legal and not doable; QED.

Germany’s call to stick to the legal framework of the TEU and the TFEU (“pacta sunt servanda”) is actually based on various reasons:

First of all, Germany does not want to burden the Greek debts, since everyone who causes its debts, has to repay them. A rather simple assumption, but it is clashing on the nation-state level.

Secondly, Germany is afraid of its own competitiveness in the view of common costs sharing through Euro-Bonds. For government bonds the rule is simple: the lower bonds’ interest rates, the more competitive you are; which is currently the case for Germany. If Euro-Bonds are being introduced, the new average interest rate would be above Germany’s current government bond interest rate, leading to a decreased competitiveness. Other countries with very high interest rates (such as Greece and Spain), would actually benefit from lower interest rates and would become more competitive.

Thirdly, if you want to introduce Euro-Bonds to the legal framework, you will have to change the existing legal regime of the EU. And recent history of the EU integration has proven on various occasions that this is nothing that can be done overnight. If we recall the discussion on the Lisbon Treaty that came into force in December 2009, discussion about details have been dragging on for months before a compromise has been finally achieved. Since every amendment to the treaties required unanimous consensus, it is a matter of course that any potential debate and discussion to adapt the existing Lisbon regime in a way that contains the possibility of Euro-Bonds, then we can prepare ourselves for a very long and extended legal debate, with a new treaty succeeding the existing Lisbon regime, after just 3 years since it came into force.

All of this just for the Euro-Bonds? Certainly, the EU Summit in Brussels won’t come to an ultimate solution these days, but it is also sure that the longer the discussion on the Euro-Bonds drag on, the less chance for a recovery of Greece will remain. The vast majority of all EU decision makers agrees with French President Hollande’s position that austerity – the “ultimate” German solution – is no working tool against the debt crisis, and Hollande even gets support from leading economists, such as from Paul Krugman and Kenneth Rogoff.

As said earlier on, it is just a matter of time until Greece goes bust and quits the Euro-Zone. And time is running out. Greece in fact only has the choice between the plague and cholera: either going bust, or dropping out of the Euro-Zone. In both cases it will open Pandora’s Box.

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