Martin Blessing is being criticized by the German government for his controversial suggestions on how to combat the euro crisis. The chief executive of the country’s second-largest bank explained to Handelsblatt’s editor in chief Gabor Steingart why he thinks “euro bonds” make sense.
Handelsblatt: Mr. Blessing, reactions to your suggestion of euro bonds ranged from, “good that somebody said that,” to that you should stick to your job running a bank, as one cabinet member put it. Why euro bonds, and why now?
Martin Blessing: Mario Draghi promised to do everything possible to rescue the euro and that calmed everybody down about monetary union. But it didn’t really address the fundamental problems; the medicine we offered had side effects, as it were. For many countries, interest rates are very low again. These countries no longer feel any pressure from capital markets to drive the structural reforms that are needed. That’s why we need to work out a system where the capital market has an effect through differences in interest rates.
But regular folk might think that euro bonds aren’t there to create pressure but the opposite, that pressure would fall if debts are shared?
They should read my suggestion through to the end. But let me emphasize that my main issue isn’t the euro bond, it’s the question of how to get to a place where we have more fiscal discipline and structural reform – how we can control and limit the accumulation of debt.
How is your proposal different to what people were saying years ago, namely take the pressure off Greece, Europe is more important than currency stability?
In the future there should be two classes of government bonds. One would be strictly limited euro bonds with shared liable capital and of the highest quality; the other would be national government bonds. The first asset class would give investors the chance to invest safely in euro bonds. The second would enable governments to take on debt themselves but they would have to pay an interest rate in line with the market. The euro bonds would have very strict requirements.
In reaction to too high interest rates for the crisis countries, the European Central Bank flooded the markets with money to give the countries some breathing space.
Yes, that’s how the central bank bought time. The question is how is that time being used? I think pressure is needed from the markets to drive reform.
In the future, should the ECB mainly buy your euro bonds?
No – the ECB can buy them but it is more likely that banks and insurances companies would buy them. Because euro bonds would dissolve the disadvantage of the euro against the dollar. If you buy U.S. government bonds today, you also buy the promise that their nominal value will be paid back to you. No similar promise exists in the euro zone, because there aren’t any real euro bonds.
The big difference is that integration in the United States is much more advanced than it is in Europe. Shouldn’t euro bonds come at the end of an integration process? That was something you once said.
True. But political integration will take decades rather than years. In the meantime, we need to strengthen the euro. If you take a look at my suggestion, it could solve a number of problems. We create pressure for more reform. We create a safe investment market, an alternative to the dollar. And we get a new class of investment that means the states’ government bonds can go bankrupt without endangering the whole euro system. In other words, any investor who buys euro bonds knows that they’ll get their money back. In some cases, investors who buy national government bonds also run the risk of a default. This would bring risk and responsibility closer together again.
Speaking of politics, in the recent elections in Saxony, we just saw the rise of a euro-skeptic party, the Alternative for Germany, or AfD. What would you tell AfD politicians about the currency’s stability?
The euro is an economic and political project. If we really want European integration then we have to make sure the currency is a success. In the long term that can only work if people who take on debt and people who buy debt take responsibility for that and don’t just assume that a third party will rescue them, whether it’s the central bank or tax payers. That’s in all of our interests.
Mr. Blessing spoke with the Handelsblatt publisher, Gabor Steingart, and Sven Afhüppe, the Handelsblatt deputy editor in chief, during Handelsblatt’s “Banking in Crisis” conference on September 3, 2014, in Frankfurt.