Handelsblatt Exclusive

German economics ministry warns of joint euro bonds

Pro European ‘Pulse of Europe’ demonstration in Berlin
The EU Commission wants to facilitate lending for euro zone crisis countries, but Germany is not amused. Picture source: Getty Images

The expectations are high for Martin Schulz, the Social Democratic challenger of Chancellor Angela Merkel at the federal elections in September. Not only his fellow party members, but also officials in Brussels, Paris and other European capitals are rooting for him in hopes of a German turnaround on European financial policy.

But so far, Mr. Schulz has provided little indication that his chancellorship will ring in a radical European policy shift. While the Social Democrats (SPD) would likely loosen stringent austerity rules, other euro zone finance plans by Brussels are met with much skepticism.

As Handelsblatt has learned, the German economics ministry, currently under the leadership of the SPD, is opposing a European Union plan to set up joint euro zone bonds.

In a paper seen by Handelsblatt, the ministry warns of the so-called Sovereign Bond Backed Securities (SBBS), also known as European Safe Bonds. Under the system, bonds from European states would be pooled and securitized with the goal of facilitating lending for euro zone crisis countries. The overall euro zone economy will be stabilized by these highly secure new bonds, Brussels hopes.

But the German economics ministry is concerned that the new plans will subject participating countries to much higher risks.

There “is a danger the proposal implicitly leads to a communitarization of risks,” the ministry wrote in the paper.

While officials at the German economics ministry agree that the new bonds could “significantly improve stability of the financial system in the long-term,” they also wrote that it was “not clear whether the new bonds can be sold at adequate terms.”

If that wasn’t the case, the “European Stability Mechanism ESM and the European Central Bank could be compelled to step in as buyers to prevent a crisis on the European bond market.”

This in turn would ultimately result in the communitarization of euro zone debt, leaving European tax payers to jointly pick up the tab.

“We are not seriously discussing such European Safe Bonds.”

Wolfgang Schäuble, Germany's Finance Minister

The European Commission will present finalized plans at the end of May. At the same time, a committee of representatives of European national central banks, the so-called Financial Stability Board, will evaluate the reform proposal. The latest assessment by Germany’s economics ministry will likely dampen prospects.

Germany’s finance ministry had already dismissed the plans in January. And Finance Minister Wolfgang Schäuble, at a meeting with his euro zone colleagues over the weekend, did not beat about the bush either. “We are not seriously discussing such European Safe Bonds,” he said. The bonds didn’t provide “European added value,” he asserted.

German economists support the country’s staunch objection to joint euro bonds. The finance ministry’s academic committee has sent a letter to the head of the Financial Stability Board, European Central Bank President Mario Draghi, warning of the EU plans.

The bonds would not be a solution to the problem that state bonds had to be counter financed with equity, said Jörg Rocholl, a member of the finance ministry committee. “Moreover, [the bonds] are vulnerable to political manipulation and therefore have to be questioned critically,” Mr. Rocholl added.

While the assessment of the German economics ministry wasn’t as sharply-worded as that of the finance ministry, the clear reference to the dangers of communitarization should be a warning shot to Brussels in going forward with the reform plans.

But overall, reform ideas such as European Safe Bonds, could “regain relevance perspectively,” the economics ministry said, pointing to the prospect of a tightening of euro zone monetary policy and its increasing cost for debt financing. The ministry therefore also considered other bond reform plans with the goal to stabilize the euro zone.

One such idea are the so-called Accountability Bonds, which intend to improve debt discipline. The proposal by economist Clemens Fuest suggests that state bonds lose their value as soon as a country violates its debt ceiling as agreed upon by law.

But Germany’s economy ministry isn’t too impressed with that idea either: “In the short-term, no stabilization of the euro zone financial market can be expected from this approach,” it wrote in the paper.

Experts also doubt whether joint borrowing will actually result in more favorable financing terms.

The ministry was most receptive to the idea of a European fiscal capacity, a joint European financial budget of some sorts, which “would allow for an effective stabilization.” But looking at Europe’s current state and member states’ reluctance to deepen collaboration, the economy ministry dampened hopes for its implementation, saying that such a proposal and its inherent communitarization of debt would be hard to justify politically.

Ruth Berschens heads Handelsblatt’s Brussels office, leading coverage of European policy. Martin Greive is a correspondent for Handelsblatt based in Berlin. To contact the authors: berschens@handelsblatt.comgreive@handelsblatt.com

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