European Commission President José Manuel Barroso said Monday he wants to introduce eurobonds issued jointly by the 17 euro nations, putting himself in direct opposition to German Chancellor Angela Merkel.
If linked to fiscal rigor sufficiently stringent to make it impossible for profligate nations to live on the backs of the euro zone’s more budget-conscious countries, namely Germany, Barroso thinks eurobonds could be a solution to the sovereign debt crisis.
Germany has opposed the principle of eurobonds, as it would expose its own taxpayers to the bad debt of weaker countries. Germany, which has the largest and strongest economy in Europe, already funds the bulk of existing bailouts.
According to Barroso, he and the Commission “are going to put those ideas forward” on Wednesday. In a study that has already been leaked to the press and is due to be presented on Wednesday, the Commission said replacing national bonds with jointly-issued eurobonds would be the most effective way to tackle the financial crisis.
However, Barroso insists that any such plan would have to be matched by tight financial and budgetary coordination between euro-zone nations.
“We need more discipline in the euro area because we are in the situation today…because of lack of discipline, because governments of Europe did not respect their commitments,” said Barroso.
The sovereign debt crisis that began last year with Greece has seen borrowing costs rise to record levels across the euro zone, with one exception: German borrowing rates have dropped sharply on safe-haven demand.
Germany has adamantly resisted eurobonds as a quick-fix solution to the crisis for the same reasons it was reluctant to bail out member states like Greece, Ireland, and Portugal, saying it was up to their governments to make sound economic decisions and win investor confidence.
Merkel and the German government “see a danger that such eurobonds could distract from … laying bare the roots of the problems and ensuring that things improve,” said Merkel’s spokesman, Steffen Seibert.
However, Germany and the European Central Bank, which is heavily influence by Berlin’s policies, both oppose a massive program of bond purchases, the only other proposition that might lower euro-zone borrowing rates to sustainable levels. For that reason, the Commission’s study is pushing for eurobonds — or Stability Bonds, as it calls them — instead of national bonds as the best way to avoid a financial collapse.
“In this way, the severe liquidity constraints currently experienced by some member states could be overcome and the recurrence of such constraints would be avoided in the future,” the draft of the study said. Eurobonds would “provide the global financial system with a second safe-haven market of a size and liquidity comparable with the U.S. Treasury market.”
However, how to effectively impose the same fiscal rigor across all 17 euro nations, thus fundamentally changing the balance of power between the European Union and the national capitals, still remains an obstacle.