Monday, August 22, 2011

Germany stands firm against euro zone bonds

From The International Herald Tribune:

Germany stands firm against euro zone bonds


BY JACK EWING

FRANKFURT — Chancellor Angela Merkel of Germany on Sunday re-emphasized her opposition to issuing bonds backed by all euro zone countries, a position that will be greeted enthusiastically by many of her fellow citizens but could unsettle investors at the beginning of what could be another difficult week in global financial markets.

Mrs. Merkel told ZDF television in an interview broadcast Sunday that the so-called euro bonds would be an option only in the distant future.

''It will not be possible to solve the current crisis with euro bonds,'' Mrs. Merkel said. She added that ''politicians can't and won't simply run after the markets.''

''The markets want to force us to do certain things,'' she said. ''That we won't do. Politicians have to make sure that we're unassailable, that we can make policy for the people.''

The German finance minister, Wolfgang Schäuble, echoed Mrs. Merkel's comments, saying that common debt would make it easier for governments to avoid pursuing responsible fiscal policies. In any case, he told the newspaper Welt am Sonntag, it would take too long for countries in the euro zone to amend the treaty on monetary union, which would probably be required to allow the issuance of such bonds.

''We have to solve the crisis within the existing treaty,'' he said.

The statements by the German leaders are in tune with public opinion in Germany as well as in other countries, like the Netherlands. The Dutch finance minister, Jan Kees de Jager, told the magazine Der Spiegel during an interview published Sunday that Mrs. Merkel should remain firm in her opposition to euro bonds.

That is not what investors want to hear, though.

Stocks around the world plunged last week amid widespread concern that political leaders were unwilling to take bold steps to attack the European sovereign debt crisis, at the same time that indicators were pointing to sharply slower growth in Europe and the United States. The benchmark Stoxx Europe 600 index dropped 6.1 percent last week to its lowest level since July 2009, with banks suffering some of the biggest drops.

Any further drop in investor confidence could also put pressure on the European Central Bank, which has been intervening in bond markets to hold down yields on Italian and Spanish debt and keep borrowing costs for those countries from reaching dangerous levels.

France and Germany have made it clear that they do not want to use euro bonds to hold down borrowing costs for countries like Italy and Spain, ''at least not imminently,'' Frank Engels, an analyst at Barclays Capital in Frankfurt, wrote in a note issued before the interviews with Mrs. Merkel and Mr. Schäuble were broadcast and published.

So far the central bank's bond market intervention, which began two weeks ago, has kept Italian and Spanish yields below 5 percent, Mr. Engels noted. In October, the European Financial Stability Facility, the Union's bailout fund, will be able to buy government bonds. But that may not be enough to keep yields within bounds, he said.

''Are these backstop facilities sustainable?'' Mr. Engels wrote. ''We have our doubts, as the E.C.B.'s stamina is probably limited and the E.F.S.F.'s balance sheet is capped.''

Mr. Schäuble told Die Welt that he did not think it would be necessary to increase the size of the bailout fund. Such comments may come as a particular disappointment to investors because Mr. Schäuble is regarded as one of the most pro-European members of the German cabinet, and among the most willing to agree to national sacrifice in the interest of saving the common currency.

But Mr. de Jager, the Dutch finance minister, said he would be willing to increase the size of the bailout fund.

Since the beginning of the debt crisis Mrs. Merkel has resisted being pushed around by bond investors; she waited until pressure became intense before agreeing to aid for Greece and other measures that were unpopular with German voters.

She also said she saw ''nothing that points to a recession in Germany.'' She acknowledged that political leaders needed to regain the confidence of financial markets but said the best way to do that would be to reduce debt.

Mrs. Merkel had earlier expressed opposition to euro bonds after a meeting in Paris last week with the French president, Nicolas Sarkozy, during which they pledged to improve economic coordination among euro members.

In the interview with Die Welt, Mr. Schäuble said he personally would be willing to cede some control over fiscal policy to a European finance minister, as Jean-Claude Trichet, the president of the European Central Bank, has proposed. But Mr. Schäuble added, ''We can only go as fast and as far as we can convince citizens and their representatives in Parliament.''

Separately, Der Spiegel reported that the German Finance Ministry had calculated that euro bonds would cost Germany an additional €2.5 billion, or $3.6 billion, in interest payments in the first year of issuance, and as much as 10 times that sum each year after a decade. Germany's borrowing costs are typically among the lowest in the world, but could rise if its reputation for fiscal prudence was diluted by closer association with countries like Italy.

A Finance Ministry spokesman said he could not confirm the Spiegel report, which the magazine said was based on estimates by unidentified ministry experts.

Opposition to euro bonds is strong within German political circles and among the country's conservative economics establishment because of the perception that the country would wind up subsidizing its neighbors.

But some economists argue that euro bonds would be cheaper even for Germany, because the volume of the bond market would rival the market for U.S. Treasury securities and promote the euro as a reserve currency. That would increase demand for the bonds and lower interest rates.

There is some support for euro bonds in Germany. Leaders of the opposition Social Democrats and Green Party have spoken in favor of common European debt. In addition, the Frankfurt Allgemeine newspaper quoted several members of Mrs. Merkel's governing coalition in Parliament on Sunday as saying that Germany should not rule out euro bonds forever.

While rejecting the bonds, Mr. Schäuble said that Germany would defend the euro ''under all circumstances'' and that the government categorically rejected suggestions that Greece should leave the euro zone, as some economists have proposed.

If Greece dropped out, he said, Europe would suffer ''a dramatic loss of trust and influence.''


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