French President Francois Hollande will be pushing plans for eurobonds at a summit of EU leaders in Brussels on Wednesday, an idea German Chancellor Angela Merkel flatly opposes.
Mr Hollande first discussed the idea at the G8 meeting in the US on Saturday and told reporters he is not the only leader hoping to create bonds underwritten by all 17 eurozone member states.
“I will outline all growth proposals,” Mr Hollande has said. “Within this packet of proposals there will be eurobonds and I will not be alone in proposing them.”
Italian Prime Minister Mario Monti and the European Commission are believed to be in favour of the bonds, which will be promoted by Pierre Moscovici, France’s finance minister. It is unclear how the bonds would work or details about the interest rate or duration.
The Germans have long refused the idea, which would involve wealthier countries assuming responsibility for heavily indebted countries, saying they would sap any incentive for Spain, Greece, Portugal and others to straighten out their finances.
Germany also argues eurobonds would likely raise borrowing costs for countries in better financial shape, including Germany.
Eurobonds are “a prescription at the wrong time with the wrong side-effects,” Steffen Kampeter, a deputy finance minister, told Deutschlandfunk radio.
UK Prime Minister David Cameron may agree in part with Mr Hollande, who he met at the British embassy in Washington before the G8 meeting. The men appeared to be in agreement on tentative proposals to issue public debt at a euro region level. While Mr Hollande was campaigning for the leadership, he proposed so-called “project bonds”, which would raise money for public works projects, and Mr Cameron later endorsed that sort of “monetary activism.”
Leaders will have to find some type of solution to shore up Greece or watch the country exit from the euro.
Greece, now in its fifth year of recession, goes to the polls on 17 June to elect a government that will inherit not only a difficult economic situation, but more than 21 per cent unemployment, volatility and violence over austerity measures and a boom-or-bust future that could involve reforms needed to receive a 130bn euro bailout plan offered by the EU and IMF.
“Staying in the euro zone will be costly, but leaving the euro zone will be much more costly for Greece and for the other countries,” OECD chief economist Pier Carlo Padoan said.
Spain: fix financial problems first
Spain’s Prime Minister Mariano Rajoy has said guaranteeing financial stability in Europe was more important than debating eurobonds.
“I believe that right now, it’s much more urgent to resolve the problems of financial stability,” he said. “The euro bonds, assuming they’re approved, need a debate, need time.”
Any common debt issuance would also require member states that now share the currency to move towards a fiscal union, the European Commission said on Monday.
“Any form of common debt issuance requires a closer coordination of fiscal policies and moving toward a fiscal union, it is a prerequisite,” Commission spokesman Amadeu Altafaj told a news briefing.
The debate has resurfaced as the euro zone sovereign debt crisis has worsened over the past month because of concerns that Greece may leave the euro zone and that Spain might be the next country after Greece, Ireland and Portugal that investors will refuse to lend to.
The European Commission published a feasibility study into so-called euro bonds in November and supports the concept, but it is a political decision.