European Commission proposes euro bonds and more control on national policies, but Germany swiftly vetoes any debt pooling.
The European Commission (EC), executive arm of the European Union (EU), sought to take charge of the euro zone crisis on Wednesday, by publishing ambitious proposals intended to bring the region’s diverse and clashing national governments to heel.
Outlining plans that would give Brussels (EU headquarters) unprecedented control over the national budgets and fiscal strategies of euro zone members, the EC also pushed for the issuance of euro bonds, to help stabilise the volatile bond markets.
However, Angela Merkel, the head of government in Germany, the nation whose approval is crucial for any solution, flatly rejected the proposals as mistaken.
According to the proposals, euro zone members would be obliged to submit tax and spending plans to the EC for comment before these were discussed by national parliaments. If the plans fail to comply with the growth and stability pact, the euro zone’s fiscal rule book, the Commission could request a revision. Although this would not be binding, it would be made public, putting political pressure on the country to comply, in effect following a ‘naming and shaming’ principle.
The Commission also proposed enhanced surveillance by Brussels of countries in fiscal trouble, including the power to send fiscal inspectors to monitor in the country concerned. In the event of the EC deeming a country to be in financial distress, it would be empowered to “recommend” to the nation in question that it “requests” financial aid.
THE ARGUMENT
Jose Manuel Barroso, the EC president, defended these plans against the criticism that they subvert democracy by giving unelected technocrats power over elected politicians. He said in the absence of strong intervention at the European level, undemocratic market forces and speculators would gain the upper hand in shaping events. The EC’s monetary affairs chief, Olli Rehn, added the current crisis was “cause for extraordinary and decisive policy action”.
In fact, Germany, the country shaping the response to the crisis so far, has been pushing for even greater fiscal integration between euro zone member-states. Supported by Finland and the Netherlands, Berlin is seeking a set of watertight rules on national fiscal management, including automatic sanctions for nations that flout the requirements.
The EC proposals stop well short of this vision. However, Brussels is aware that greater fiscal coordination is the pre-condition for the Germans to even consider the other idea outlined by Barroso on Wednesday — euro bonds.
With fiscal contagion spreading to the core of the euro zone, (even mighty Germany struggled to sell 35 per cent of its bonds up for sale on Wednesday), euro bonds are increasingly being touted as the only solution likely to convince markets to back off.
The EC chimed in on the debate by publishing a paper outlining three choices. The most ambitious is the complete substitution of national bonds by euro bonds or ‘stability bonds’ as the Commission has dubbed these. While arguing this option would be the most effective in restoring stability to the region’s bond market, the report also admits it would require extensive changes to EU treaties that could delay its implementation by years. Complete substitution would also carry significant risks of ‘moral hazard’, whereby fiscally profligate countries might be tempted to piggy-back on economically stronger members of the club and avoid painful structural reforms.
The other two measures outlined could be adopted more quickly and are variations on a plan that would have countries provide only limited guarantees for new bonds, but not eliminate national bonds.
NEIN, SAYS BERLIN
But, the Commission’s ideas were rejected even before being formally published, by German Chancellor Angela Merkel. Speaking to the German parliament, she said she found it “extremely worrying” and “inappropriate” that Brussels was publishing its euro bond proposal. Germany remains convinced that only structural reforms by countries in trouble can provide long-term solutions to the crisis. Berlin is afraid that euro bonds would merely serve to drive up its own borrowing costs and expose its taxpayers to the bad debt of weaker countries, while removing incentives for struggling nations to get their finances in order.
With Merkel still unbending, the EC proposals will be hard-pressed to win the support they need from member-states if these are to be put into practice. Nonetheless, they add pressure on the chancellor, who is facing a growing chorus of sentiment across Europe in favour of pooled debt.
