Call for eurobonds to bolster eurozone

EU leaders divided over the idea of issuing eurobonds and scale of funding to forestall future crises.

EU leaders are split over how to deal with future eurozone crises, with Germany opposed to calls for the issue of eurobonds and for an increase in the size of funds available for crisis management.

Ahead of a meeting of eurozone finance ministers this evening to discuss details of a permanent crisis mechanism, Jean-Claude Juncker, Luxembourg’s prime minister and president of the Eurogroup, and Giulio Tremonti, Italy’s finance minister, have called for common issuance of eurobonds, so-called E-bonds, as a sign of the “irreversibility of the euro”.

In an opinion piece published in the Financial Times, the two ministers call for the creation of a European Debt Agency (EDA) that could issue eurobonds worth up to 40% of the gross domestic product of the EU. The EDA would finance issuance of up to 50% of each country’s eurobond debt. The EDA could finance 100% of a country’s debt in the exceptional case that a country no longer had access to the bond markets. Juncker and Tremonti say that this would allow eurozone member states to consolidate their public finances without being subject to short-term speculative attacks.

Wolfgang Schäuble, Germany’s finance minister, is quoted in today’s Financial Times as saying that common eurobond issuance would require “fundamental changes” to the EU’s treaties, effectively ruling such a move out for the foreseeable future. Germany is concerned that setting up a common debt agency would increase its borrowing costs, as, because of its reputation for sound public finances, it can borrow more cheaply from the bond markets than any other member of the eurozone.

Emergency funding

At the meeting this evening, ministers will discuss a report from the International Monetary Fund (IMF) on the economic situation and the handling of the eurozone crisis. According to agency reports, the IMF is urging the EU to increase the amount of funds available for a future crisis management fund, the European Stability Mechanism (ESM), from the current level of €440 billion available under the European Financial Stability Facility (EFSF).

“There is a strong case for increasing the resources available for this safety net and making their use more flexible, including for the purpose of providing more effective support to the banking system,” the IMF report says.

Germany is reported to oppose increasing the funds for the ESM because of domestic political opposition to providing more money to struggling eurozone members. Votes to provide funds for Greece and for the EFSF were only approved with narrow majorities in the German parliament.   

EU leaders are supposed to finalise the details of the ESM at their summit meeting in Brussels on 16-17 December. Senior EU officials met in Brussels on Sunday to discuss details of the mechanism. They included: José Manuel Barroso, the European Commission president; Juncker; Herman Van Rompuy, the European Council president; Olli Rehn, the European commissioner for economic and monetary affairs; and Jean-Claude Trichet, the president of the European Central Bank.