This article is from the source 'guardian' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.guardian.co.uk/business/nils-pratley-on-finance/2012/may/23/why-germany-doesnt-want-eurobonds

The article has changed 2 times. There is an RSS feed of changes available.

Version 0 Version 1
Why Germany doesn't want eurobonds Germany and its eurobonds resistance
(40 minutes later)
Markets bounced on Tuesday as the magic word "eurobonds" was heard — new French president Francois Hollande is keen and Christine Lagarde at the International Monetary Fund has endorsed the principle of more debt-sharing in the eurozone. Today share prices are down partly because investors have remembered that we've been round the houses on eurobonds several times already during this crisis and the debate always comes back to the same point: Germany is reluctant to underwrite the debts of its neighbours. That reluctance looks entrenched as ever, whatever Hollande and Lagarde might wish. Markets bounced on Tuesday as the magic word "eurobonds" was heard – new French president, François Hollande, is keen and Christine Lagarde at the International Monetary Fund has endorsed the principle of more debt-sharing in the eurozone. On Wednesday share prices are down partly because investors have remembered that we've been round the houses on eurobonds several times already during this crisis and the debate always comes back to the same point: Germany is reluctant to underwrite the debts of its neighbours. That reluctance looks entrenched as ever, whatever Hollande and Lagarde might wish.
In what circumstances might German budge? Gary Silverman of Swordfish Research has the answer — "only at one minute to midnight if the alternative was a complete collapse of the system." In what circumstances might Germany budge? Gary Silverman of Swordfish Research has the answer: "Only at one minute to midnight if the alternative was a complete collapse of the system."
That is surely correct. There was an almighty struggle within the German parliament even to get the current fire-fighting funds, such as the European Stability Mechanism, equipped with commitments. Eurobonds are of another order altogether. In their purest incarnation as a full sharing of debt among eurozone members, they imply a pan-eurozone treasury and something close to full fiscal and political union. Without those ingredients, Germany will continue to regard eurobonds as "the equivalent of ringing the bell for a happy hour so the inebriated can postpone their hangover indefinitely," as Reuters quotes one EU official as saying. That is surely correct. There was an almighty struggle within the German parliament even to get the current fire-fighting funds, such as the European Stability Mechanism, equipped with commitments. Eurobonds are of another order altogether. In their purest incarnation as a full sharing of debt among eurozone members, they imply a pan-eurozone treasury and something close to full fiscal and political union. Without those ingredients, Germany will continue to regard eurobonds as "the equivalent of ringing the bell for a happy hour so the inebriated can postpone their hangover indefinitely", as Reuters quotes one EU official as saying.
Of course, Germany is deluding itself it believes a break-up of the eurozone would be a pain-free experience for it. Demand for German-built BMWs and machine-tools would fall dramatically if buyers were obliged to pay in new, soaraway Deutsche marks or a new, slimmer "northern" euro. So, maybe, Germany can be bludgeoned into accepting some form of debt-sharing eventually if its neighbours agree to submit to ever-greater fiscal control from the centre. The point, though, is that is simply not going to happen overnight, even if one could be confident that eurozone voters would approve (a distinctly unsafe assumption in any case). The most that could realistically be achieved quickly is some form of "eurobond-lite" — perhaps a pooling of only the riskiest slices of debt. But the appearance of such an instrument might merely reinforce the idea that real eurobonds remain over the horizon. Of course, Germany is deluding itself it believes a breakup of the eurozone would be a pain-free experience for it. Demand for German-built BMWs and machine-tools would fall dramatically if buyers were obliged to pay in new, soaraway Deutsche marks or a new, slimmer "northern" euro. So, maybe, Germany can be bludgeoned into accepting some form of debt-sharing eventually if its neighbours agree to submit to ever-greater fiscal control from the centre. The point, though, is that it is simply not going to happen overnight, even if one could be confident that eurozone voters would approve (a distinctly unsafe assumption in any case). The most that could realistically be achieved quickly is some form of "eurobond-lite" – perhaps a pooling of only the riskiest slices of debt. But the appearance of such an instrument might merely reinforce the idea that real eurobonds remain over the horizon.
Olli Rehn, the European commissioner for economic affairs, calls for a "road map" to set out the steps towards eurobonds. Markets, though, are weary of road maps. The Greek election is 17 June. Investors want to be confident that the contagion from a possible Greek departure from the euro can be contained. The fixation with eurobonds suggests policymakers are not prepared for an exit that could take place before summer is out. No wonder these relief rallies in markets fade in no time at all. Olli Rehn, the European commissioner for economic affairs, calls for a "roadmap" to set out the steps towards eurobonds.
Markets, though, are weary of roadmaps. The Greek election is on 17 June. Investors want to be confident that the contagion from a possible Greek departure from the euro can be contained. The fixation with eurobonds suggests policymakers are not prepared for an exit that could take place before summer is out. No wonder these relief rallies in markets fade in no time at all.