How long will Eurobonds be set aside?

The German chancellor, Angela Merkel, and French president, Nicolas Sarkozy, have indicated during their last meeting which took place on Tuesday that the discussion on the implementation of Eurobonds could not be furthered before the full fiscal and budgetary process had been completed.

Germany is convinced that such a step would greatly increase its borrowing costs and would prevent countries in dire situations to carry out the necessary structural reforms.

Spain and Italy which have welcomed the franco german proposal for greater economic integration of the Eurozone are hoping that the creation of Eurobonds will result from this process. These countries, whose default is feared by the markets, suffer from higher interest rates than France and Germany, the two biggest economies of the monetary bloc.
“The more we move towards the integration of economic policy, the more we move towards the idea of Eurobonds” has indicated José Bianco speaking for the Spanish socialist party on national radio. In Italy, the head of the parliamentary group of President Sylvio Berlusconi’s party, has stressed that the government was in the same line of thought as the French and German leaders.
“We hope that Merkel will be convinced of the usefulness of Eurobonds in September” had added Fabrizio Cicchitto.

For financial investors, the application of those bonds looks inevitable. According to Hungarian born American financier George Soros, aged 81 years old, European countries must go much further. In an interview given to Le Monde newspaper, the head of the Soros fund management believes that the euro is in danger. “The situation is really bad and it is only now that authorities have started taking things seriously. Up till now, they have only reacted to market pressures. Now they are starting to discuss about long term solutions. Nowadays, we have no other choice than to improve Eurozone governance. The question is not about establishing whether we need a single currency or not. The euro exists and any collapse of this currency would lead to an out of control banking crisis. The world would fall into a steep recession. Nicolas Sarkozy was right in saying on Tuesday that Eurobonds must be considered at the end of the process. This must be the aim. To get out of this situation, member countries must finance themselves at a reasonable cost and the Eurobonds are the best way to achieve this aim. The devil is however in the details. By who, how and in what amount must these bonds be issued? All of that needs to be discussed and this is not enough. With all the discussions taking place on Eurobonds, we tend to forget about the European banking system which is also in crisis. These banking institutions are too fragile since they are not sufficiently capitalized and hold a lot of European debt securities which were considered risk free until now. This is obviously not the case particularly when it comes to Spanish and Italian securities. This risk needs to be neutralized with Eurobonds and banks have to be recapitalized. They have trouble lending to each other and are suppressing their credit lines. All of this is pushing Europe into recession” he indicated.

Jacques Delors, former French finance minister aged 86, said in an interview given to Belgian daily paper, Le Soir, that last Tuesday’s franco german summit did not bring the necessary answers to the debt crisis when the launch of Eurobonds failed. The former president of the European commission who was among the founding fathers of the single currency during the writing of the Maastricht treaty goes further by saying that the Euro and Europe are on the brink of collapse.
“In order to avoid falling, the choice appears to be simple: either the member states accept greater economic cooperation which I have always supported or they transfer additional power to the union. Only the first option remains since the second one has been rejected by the majority of the 27 members…”he adds “Last Tuesday, Nicolas Sarkozy and Angela Merkel have proposed the creation of a Eurozone economic government which will meet at least twice a year with a stable president and taxation of financial transactions. “As such, it won’t serve any purpose. The francogerman dialogue is maintained and I’m happy about it but once again Mrs Merkel makes no compromise” Jacques Delors proposes to partially mutualise the state debts to around 60% of their GDP, the maximum level retained in the Maastricht treaty to participate to the single currency. These Eurobonds are absolutely necessary according to him.
“How can they think that the markets will believe in the promises of the Eurozone summit on the 21st of July, if we need to wait till the end of September to get things done?” asks the former European Commission president. If the debt crisis can be resolved, Europe will break down and will become a mere free trade zone” he adds.

François Fillon, French prime minister, has reacted this Friday by estimating that Eurobonds would increase the cost of debt for France and could threaten its rating. According to him, Eurobonds cannot be conceived without an economic integration. The latter holds no consensus right now. He calls for unity and to the sense of responsibility of all political parties on the golden rule.