It’s a good sign when a top bank manager like Commerzbank’s Martin Blessing enters the debate on how to solve the euro zone crisis. Leaders in Germany’s financial industry have refrained far too long from offering concrete solutions. Previously when bankers spoke up after the global financial crisis, they mostly only criticized what they considered bad regulation.
Now, with his call for euro bonds, Mr. Blessing is reviving a discussion that seemed to be all over. German Chancellor Angela Merkel has been so blunt and unequivocal about her opposition to “the communization of government debt” that, for a long time, no one with any weight in Europe dared address the issue.
So there is a certain chutzpah when Mr. Blessing, whose bank is still being kept afloat with government money, ignores the chancellor’s “not-over-my-dead-body” decree on euro bonds. Mr. Blessing’s proposal, it must be said, is not a hasty reaction and merits serious discussion. But his call for euro bonds to replace a portion of national debts would contravene current laws.
The Stability and Growth Pact is based on the fundamental concept of budgetary responsibility. Through regulations that govern debts, narrow limits are imposed on nations borrowing money. In order to help achieve sustainable government financing, founders of the euro currency union excluded a reciprocal liability for national debts. At the same time, the mandate of the European Central Bank was limited to preserving price stability. A monetary financing of national debts of euro countries is explicitly forbidden.
Mr. Blessing now wants to annul both of those principles. The justification he cites, namely that the financial crisis has already damaged these cornerstones of the euro zone, cannot be left undisputed. The European Stability Mechanism – which loaned money to highly indebted countries, guaranteed by other currency union members – was set up only to provide aid in an emergency situation. And this assistance is awarded only in return for accepting tough stipulations.
This is something entirely different from Mr. Blessing’s idea of using euro bonds to finance one-fourth of a country’s national debt in relation to its gross national product. This would mean that joint liability for national debts is no longer an exception but the norm.
Mr. Blessing also seeks to normalize the controversial purchase of state securities by the European Central Bank (ECB). According to his model, the bank should be granted permission to buy the new euro bonds. The promise by ECB President Mario Draghi to buy government bonds applies only to over-indebted euro zone countries that have enacted austerity measures. So Mr. Draghi can’t unconditionally purchase government securities.
It would make more sense to introduce euro bonds after further political integration of the European Union.
Mr. Blessing hopes to add a condition for issuing euro bonds by raising interest rates for a country’s remaining national debt securities. But in the past, higher interest on their own state bonds hasn’t stopped nations such as Greece or Portugal from taking on more and more debt.
Nevertheless, Mr. Draghi’s promise to buy as much state debt as necessary caused a sharp decline in interest rates for securities in crisis countries. Today they are at historic lows because investors can count on the European Central Bank to jump in when needed. Basically, there is no longer a difference in risk between Spanish or German government bonds – and this is a problem that must be fixed as soon as possible.
But it’s questionable whether now is the time for euro bonds. It would make more sense to introduce them after further political integration of the European Union. And that would require euro countries to give up a part of their national sovereignty, particularly in budgetary matters, and allow more coordination of national economic policies.
Only in a world where there are rights to intervene on national budgets can debts be at least partially shared. Europe is still far from this degree of solidarity. This may be cause for regret. But on such an important matter, it’s dangerous to take the second step before taking the first one.
This article was translated by George Frederick Takis. Greg Ring also contributed. To contact the author: firstname.lastname@example.org