Users: JBL73: Testosterone Pit - Home - Eurobonds, Fiscal or Banking Union—They're All Utopia

Contributed by George Dorgan, a macro-based fixed-income and currency overlay portfolio manager based in Switzerland, and the main editor of the blog SNB & CHF.

German politicians and the German Bundesbank believe that the Euro crisis can be only solved by supply side reforms as formulated in the Stability and Growth Pact, reforms that were already successfully introduced during the Thatcher/Reagan era and in Germany between 2000 and 2007.

Merkel’s CDU does not want Eurobonds; for her party commonly issued bonds would be an incentive for the PIIGS not to implement austerity and supply-side reforms. The Fiscal Compact formalizes the austerity plan: It requires the strong reduction of government debt and a balanced budget rule. The ratification of the Fiscal Compact including the balanced budget rule is the precondition that countries may get access to the permanent European Stability Mechanism (ESM), which was originally designed to replace the temporary EFSF.

In December 2011 Germany and France advocated steps towards a fiscal union. According to Merkel a fiscal union would require that Brussels has to approve national budgets, a measure still rejected by France. Some commentators even suggest that the logical step of a fiscal union would be a centralized finance ministry under EU or German lead.

After France’s new president Francois Holland had revealed his plans to cut the pension age to 60 years, Merkel has promptly introduced the step of a political union including common economic policy and a loss of sovereignty towards Brussels (which would never have permitted the pension age reduction). Only after that a fiscal union would be possible.

The final step Eurobonds, i.e. unlimited common responsibility, implies directly unlimited transfers among member states. The same applies to a banking union.

In summary:Step 1) Stability and Growth PactStep 2) Fiscal CompactStep 3) ESM (Permanent loans among members)Step 4) Political union with common economic policyStep 5) Fiscal union including a central authority to approve national budgetsStep 6) Eurobonds, banking union, transfers among members

English-speaking press and many hedge funds are sure that Germany will pay

The French president and economists especially in the english-speaking countries and very influential papers like ”The Financial Times” or “The Economist” want Germany to take anti-crisis measures and finally to shortcut the route to Eurobonds and a banking union, which implies German transfer payments and not only loans. At the same time their domestic countries, the UK and the US do not want a strong increase of their contributions to the IMF, whereas BRICs countries agreed to raise their payments to the IMF by 95 bln. US$.

Financial markets and hedge funds are of the strong believe that Germany will finally give in and allow for Eurobonds to avoid a global financial crisis.

As German native speakers we strongly suggest investors not to buy in what these papers are writing and what these hedge funds are betting on. We believe in what the German press and what German politicians and courts say.

Merkel’s stance against Eurobonds has hardened

First of all, Merkel assumes that Greece and even contagion to Italy and Spain is rather like the 1998 Asia crisis, but not a global downturn in the center of the financial system in the United States like the sub-prime crisis was. In the strong trust that no global crisis is imminent, Merkel has hardened her stance as compared to last autumn’s endless attempts to solve the crisis when many were fearing a US recession. And even if the global crisis comes: The world should not overestimate Germany‘s abilities. Last but not least, Finland, Austria and the Netherlands also oppose common bonds.

Even German opposition now against Eurobonds

Together with increasing popular German protests against the ESM, even the German opposition (socialist SPD and greens) has recently rejected Hollande’s demands of a quick introduction of Eurobonds even if some months ago they were still in favor of them. Merkel’s coalition partner FDP compared Eurobonds to giving a box of whisky to an alcoholic.

Instead the German opposition is in favor of a “common debt repayment fund“, which would assume all euro zone debt beyond the threshold of 60% debt, financed by common bonds. All debt under 60% will still belong to the single countries. The debtors, i.e. all nations in the euro zone would be required to repay all debt in 25 years and accept the conditions of even stronger supply-side reforms than the Stability and Growth Pact. The Bundesbank swiftly rejected this idea, because it would imply that the equivalent 90% of German GDP would go to the fund.

Anything beyond ESM is against the German constitution

Already the ESM, on which Germany could theoretically earn money, borrowing at 1 % and lending at 4% or more, has difficulties to pass the constitutional court. The German president Gauck will only sign the law, after the court has examined it. Last year, the court let the EFSF, the temporary bailout fund, pass. The German Wolfgang Münchau of the FT, an advocate of Eurobonds, explained that it will be a lot more difficult for a permanent bailout fund like the ESM to pass. Still it has a chance, it is a just lending some money to the other nations not a transfer, however a permanent lending. For Münchau a borderline case.

Anything beyond the ESM including a political, fiscal or banking union, Eurobonds or the debt repayment fund would require that the German people abolishes its Grundgesetz by a referendum and adopts a new constitution, a process that can take many years.

Eurobonds are light years away

As opposed to Germany, France is more reluctant to a central government or a severe central fiscal authority. It could destruct France’s dream of “La Grande Nation” and the strong desire of the French people to live in a welfare state.

The final step, Eurobonds and permanent transfer payments are ”light years away”, as Tim Duy put it in Economonitor. Before these permanent transfer payments happen, the euro zone might have been dissolved and recreated in some different forms several times. Eurobonds are hence pure utopia. Cross-posted from SNB & CHF.

Germany and Austria have plunged into public soul searching about the euro and the endlessly growing expense of maintaining it. Like so many things that appear useful, the euro has become dangerous. Read.... “The Euro Is Like a Knife in the Hands of a Child.”