Disagreements and Progress on Eurobonds at EU ‘Informal Dinner’

At the informal dinner of Heads of State or Government on 23 May 2012 Franco-German differences on eurobonds figured highly. Chancellor Merkel argued eurobonds were illegal under current EU law, and others have expressed concern about their legality under German law. However, the French President, Francois Hollande, has insisted that eurobonds remain on the table, although he acknowledged “a number of countries were totally hostile, others considered this in the long term and yet other countries considered that it could be feasible at a closer date.” This was echoed by An Taoiseach, Enda Kenny, stating, “people were clear that [developing eurobonds] would be a very long process indeed”.

The proposed eurobonds are bonds issued jointly by all 17 Eurozone Members States. They are proposed as a tool to be used in dealing with the eurocrisis. Calls for the creation of eurobonds have been growing stronger. Last summer Reuters conducted a poll and found that 41 out of 59 economists polled believed that eurobonds would be a good ‘long-term solution to resolving the crisis’, although a smaller number expected euro zone leaders to agree to their establishment. Calls for eurobonds have come from a wide variety of places. The Economist points out that former EU Commissioner, Mario Monti, investor George Soros, former German Finance Minister and prominent member of the opposition, Peer Steinbrück, have all called for them. More recently, here at the Institute of International and European Affairs, Charles Dallara, Managing Director of the IIF, has called for their creation, as did Professor Maurice Obstfeld of the University of California, Berkeley.

Opposition to eurobonds has been very strong in Germany. Hans Werner Sinn, President of one of Germany’s largest economic research institutes and a very prominent economic commentator in Germany, went as far as to say “eurobonds would destroy the euro zone”. Opinion polls show that German’s overwhelmingly oppose the proposed eurobonds.

The intransigence of German opposition has meant that, until recently, negotiations on eurobonds at a European level have not made much progress. The major exception to this is the publication of a Green Paper by the European Commission on eurobonds on 23 November 2011[i]. It is likely that this paper will be the basis of any future negotiations on the issuance of eurobonds.

With the election of Francois Hollande as President of France, calls for eurobonds have been given a real boast. His support adds to a growing majority of European states that are in favour of the creation of eurobonds. Mario Monti, the Italian Premier, said of this week’s informal meeting, “A majority of countries said they were in favour of eurobonds, even those not in the Eurozone, like Britain”. The momentum for a change in European policy concerning eurobonds has been further boosted by calls from the OECD for their creation and with signs from last weeks G8 conference in Camp David that Obama is getting behind Hollande in his disagreement with Merkel.

However, the Franco-German conflict should not be overstated, nor should Germany’s isolation on this issue. Germany has been supported in their opposition to eurobonds by Netherlands, Finland and Austria. Despite the divergence of opinions on eurobonds, Merkel described the negotiations as balanced. “We spoke differently about eurobonds. I said we need greater economic co-ordination in Eurozone and that we see considerable difficulties when we think of the fiscal treaty what possibilities exist to shape the treaties,” she said.

On this point European Central Bank President, Mario Draghi, supported Merkel saying eurobonds made sense “only when you have a fiscal union”. This sentiment echoed comments last August by European Council President, Herman Van Rompuy. “We could only have eurobonds the day when there is truly a real budgetary convergence, the d­ay when everyone is running a balanced budget or practically a balanced budget. That’s when we could have a eurobond. But not before,” he said.

Instead of eurobonds, Germany is supporting the proposal for project bonds. Project bonds are a proposal for the EU to support specific investment projects. The European Investment Bank would invest in the riskiest element of privately issued bonds thereby making the rest of the debt appear safer and allowing it be securitised at an investment grade. Notable progress has been made on project bonds recently. President of the Commission, José Manuel Barroso, said that “concrete action for targeted investment, project bonds” had been discussed and that these discussion went much further than in October 2011, when many were against a similar proposal. He said that on Tuesday, 22 May 2012, “an agreement between the Council and the Parliament to launch a pilot phase for project bonds” was reached.

However, Enda Kenny has not shown much enthusiasm about the project bonds proposals. The Irish Times reports he “described proposals for the creation of project bond as fine, but warned that they needed to be flexible for smaller countries and should not just be confined to trans-continental projects.”

Despite the changes and development on eurobonds, no real change in policy took place at this week’s informal dinner. Nor was it intended for any real change to be achieved, the aim was rather to facilitate communication in advance of the European Council on 28/29 June, where the Greek situation and eurobonds will be discussed.

[i] In this document eurobonds are referred to as ‘stability bonds’.