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In Germany, Commerzbank Chief Calls for Eurobonds

Eurobonds have his Blessing. Source: Reuters
Eurobonds have the blessing of the German CEO of Commerzbank.
  • Why it matters

    Why it matters

    Eurobonds would enhance Europe’s status as a financial center by creating a liquid bond market that boosts the euro’s value as a reserve currency.

  • Facts

    Facts

    • Eurobonds would give euro countries stronger incentives for fiscal discipline.
    • The bonds would create a secure, attractive market for international investors.
    • Joint bonds would reduce the dependence of national banks on European countries.
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    Audio

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“Politics begins with the contemplation of reality.” This statement from the German post-war Social Democrat Kurt Schumacher describes a pragmatic understanding of politics free from wishful thinking. It is exactly this point of view that we should have when we take stock of issues relating to the euro and look at the prospects of Europe’s economic and currency union. Two facts strike me as particularly important.

First, the Continent’s financial and sovereign debt crisis is not over. The intervention by European political leaders and above all by the European Central Bank has eased the acute threat since mid-2012. And the ECB purchase program will only buy some time. It doesn’t solve the problems. The most recent turbulence in Portugal involving Banco Espirito Santo has made that dramatically clear.

Second, a large part of international business must be conducted in U.S. dollars even though it is not taking place in the United States. This has considerable effect on the competitiveness of the respective financial markets. And in order to level the playing field with the United States, there must be a successful push to establish the euro as a safe haven investment.

If that does not work, both the euro, and with it all of Europe, are at risk of losing relevance compared to world powers such as the United States and China. Therefore, the euro is not just a currency, but also a political project.

Further essential reforms are, therefore, needed to strengthen the security and significance of the euro. I am firmly convinced that a common currency cannot work in the long-term without joint fiscal policy and discipline.

Let’s contemplate reality. The idea from the Maastricht Treaty of “self commitment of all to binding rules” has not worked. And the debate currently over the softening of the fiscal pact shows that the second attempt to make it work is also at risk of failing.

It will also take decades for the realization of political union in Europe, if it ever comes. In addition, a further political integration only has a chance if the euro is established as a strong and reliable reserve currency next to the U.S. dollar.

How will that work? With the launch of “real” eurobonds. And not as I had previously advocated as the last step at the end of the processes of political union. Liability for the indebtedness of the other member states has already happened due to the activities of the European Central Bank.

With the message from ECB President Mario Draghi — “whatever it takes” — in July 2012, eurobonds were essentially introduced through the back door. Furthermore, the European Stability Mechanism is already issuing community bonds. As recently as July 2014, more than €4 billion were issued via a 30-year-bond.

If these bonds fail, the member states are liable for a percentage at the level of their ECB shares, in Germany’s case 27 percent. Unlike if there had been an explicit joint liability, in this case there would be no necessary political measures taken.

In short: a joint liability already exists for the euro-zone countries. We must accept that. Therefore, I consider a legal and binding framework for eurobonds to be absolutely necessary.

This legal and binding framework should give the euro zone countries strong incentives for improved fiscal discipline. It should also create a more secure and liquid bond market for international investors. And it can reduce the mutual dependence of banks and countries.

Eurobonds are a hot-button topic, especially for many Germans. For them, eurobonds pave the way for a transfer union, create false incentives and undermine the will to reform in crisis-hit countries.

My argument against that is firstly, there is not just one concept for eurobonds. There are many different possibilities that, especially during the high point of the sovereign debt crisis, were the subject of controversial debate.

Secondly, and this is crucial, the general conditions are different now than they were three years ago. The banking union will change a lot in Europe. With European supervision, Europe has made a great step forward on the way to an integrated European financial market.

In my opinion, it is no longer a question of “if” but rather “when”and “how”eurobonds will be launched. We should not close our eyes to reality, but should soberly weigh it and create a legitimately democratic process for borrowing in euros.

A Plea for “Real” Eurobonds

Jointly secured bonds are conceivable in many different variations. Essentially, they differ by the nature and extent of the liability and the amount of the national bond issues, which should, in part, be replaced.

In my approach to eurobonds I strive for a fair balance between the communization of sovereign debt and preserving the autonomy of euro zone countries.

Despite all of the criticism of joint liability, the reality in Europe should be examined unemotionally.

The idea is this: the European Stability Mechanism, or ESM, would be rebuilt into a central debt agency.

This new European debt agency would be authorized to issue eurobonds to member states up to a limit of 25 percent of their respective gross domestic products.

The interest payments and redemption must be guaranteed by the countries and should be a priority over their own government bonds. The borrowed capital capped at 25 percent of GDP would technically be communized, which means a eurobond could be used to finance several countries.

As collateral, they must transfer a portion of their value-added tax income to the ESM, which would act as the sole issuer. An expansion of the indebtedness quota could only be approved with a three-quarter majority of ESM shareholders. That would guarantee democratic controls and set a high barrier to taking on more debt. The intended result is better fiscal discipline.

The role of the ECB is crucial. The ECB must get permission to acquire these eurobonds without foisting a restructuring program on countries. Hence, a eurobond market would be created, offering investors investments that are both liquid and, because of the possibility of the ECB acquiring them, secure.

Institutional investors and other central banks could therefore keep larger portfolios of bonds in euros. The euro would have the chance to become a real reserve currency next to the U.S. dollar. Europe’s role in the world would strengthen considerably.

One prerequisite would be that the ECB would end the so-called OMT Program, which allows it to purchase unlimited government bonds on the secondary market in order to stabilize the bond market in the euro zone.

With this implicit ECB guarantee, the differences in interest rates between countries with good and bad credit worthiness are not in line with the market. Namely, there is no incentive for countries to have better budgetary discipline.

The interest will reflect the actual risk when it is possible again for a country that cannot meet its debt commitments to be declared bankrupt.

It is my recommendation that countries should not have their sovereignty curtailed, and should be able to create their own debts and should continue to be able to issue their own bonds.

Through the ranking and liquidity of eurobonds, they would have an advantage over individual government bonds. That would give the member states an incentive after the transition period to exhaust the 25 percent of GDP common debt and limit as much as possible their use of their own, more expensive national government bonds.

Ideally, this would mean a maximum of another 35 percent in national issued debt in compliance with the Maastricht criteria of 60 percent total debt measured as a share of GDP.

Banks would then have a large interest in holding “real” eurobonds on their books. Because unlike for individual national government bonds, banks would not have to hold capital for these securities.

This fits with my previoius suggestion to relinquish the zero weighting of the risk assessments of government bonds. The zero-risk weighting of eurobonds and the risk weighting of national bonds would help reverse the intertwining of banks and countries.

That would also make it manageable for a euro zone country to default on its payment, without using tax money and damaging the contributions of those who save.

Despite all of the criticism of joint liability, the reality in Europe should be examined unemotionally. We have already taken on such liability in myriad ways, but so far only without a binding framework.

Now the time has come to take the next steps for strengthening the currency union. We should create a liquid and transparent market for “real” eurobonds and in doing so establish a counterpart to the U.S. bond market.

Through launching eurobonds we could permanently establish the euro as a meaningful global currency and thereby secure the importance and competitiveness of Europe in a lasting manner.

The author is the chief executive officer of Commerzbank, Germany’s second-largest bank.

 

This article was translated by Mary Beth Warner. To contact the author: gastautor@handelsblatt.com

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