Mario Draghi's call for joint EU bonds hits wall of German opposition

Jana Randow, Mark Schroers and Kamil Kowalcze

Joint debt just isn’t on Germany’s agenda — irrespective of Mario Draghi’s warning that it’s the only way to make the European Union more competitive with China and the US.
 

The former Italian premier had barely finished presenting his long-awaited report on Monday about how to fix Europe’s ailing economy — with its centerpiece of common bond issuance — when Finance Minister Christian Lindner retorted that such an approach won’t solve the region’s structural problems. 
 

“I am very skeptical about Mr. Draghi’s approach to debt,” the German politician told N-TV in one of a series of swift reactions. “That can be summarized briefly: Germany should pay for others. That can’t be a master plan.”
 

 

That reaction from Berlin highlights the challenges of turning a 400-page recipe to restore competitiveness and help the bloc compete on global markets into reality.
 

The resistance to Draghi’s call for the region to invest as much as €800 billion ($884 billion) extra a year and commit to regularly issue common bonds prolongs a history of stalemate between rival ambitions.
 

“Draghi’s message is meant to deliver a wakeup call,” said Gilles Moec, chief economist at Axa Group. “We can compete with the US, we know what to do, it’s within our means. But you need to push the European idea very hard because there’s a feeling out there in many parts of the region that national governments can take better care of the economy.”
 

Italian pleas for the EU to become more than the sum of its parts by combining the fiscal firepower of its nations have long met with opposition led by Germany, its biggest economy, which was reluctant even to participate in the euro project itself.
 

Such pushback may be all too familiar to Draghi, a former European Central Bank president who lamented during his Frankfurt stint about a “nein zu allem” — no to everything — approach by his Bundesbank counterpart, Jens Weidmann, when combating the region’s debt crisis and then tackling the threat of deflation.
 

For all the heft of his report, the Italian knows that maybe a fraction of his proposals may see the light of day anytime soon. 

What Bloomberg Economics Says...
 

“While it is doubtless true that former European Central Bank President Mario Draghi’s recommendations have merit, the likelihood of full-scale adoption is low.”
 

—Jamie Rush, chief European economist. Read his EUROPE INSIGHT here 
 

Some ideas — a push to reduce the regulatory burden or facilitate cross-border innovation — may find support. Key pillars ranging from joint debt to the completion of a capital markets or banking union remain out of reach for now. 
 

Further sapping momentum is the unusual constellation of pervading political weakness in the two key countries whose zeal has been critical to the EU’s drive for integration.
 

French President Emmanuel Macron leads a nation in limbo after elections resulted in a legislative impasse, while German Chancellor Olaf Scholz is fighting for his coalition to survive after two regional votes saw one in three people voting for far-right extremists.
 

“The key drivers of European progress have lost a lot of weight due to domestic issues,” said Marco Valli, chief European economist at UniCredit. “Moves toward the right and more nationalist and inward-looking policies aren’t the ground for the sort of positions that Draghi advocates.”
 

Lindner is known for his hawkish stance, but isn’t alone. Neither of Germany’s other two parties in government are keen — although Economy Minister Robert Habeck said in a statement that he supports Draghi’s call for investments in Europe in principle.
 

The current opposition, which could win next year’s national elections, is just as skeptical. An objection to more joint borrowing was part of the conservative Christian Democrats’ European election bid earlier this year.
 

Marcel Fratzscher, president of the DIW Institute, called on the government and the opposition to give up their resistance. 

“An important part of competitiveness and prosperity is the strengthening of European institutions, a deepening of the internal market and less nationalism and national solo attempts — German politics in particular should take greater account of this,” he said.
 

Part of politicians’ reticence is rooted in strict oversight by Germany’s constitutional court. Last year, judges declared an attempt to circumvent its debt brake as unconstitutional and brought the coalition to the brink of collapse. 
 

The court also has a clear position on joint borrowing. It ruled that the Next Generation EU program — an investment plan of hundreds of billions of euros to help countries recover from the pandemic — must remain temporary, limited to exceptional circumstances and strictly targeted for a certain purpose.
 

But skepticism is increasingly taking hold in society too, and doubts about the EU were one reason behind the extremist surge. 

The irony is that Germany’s export-oriented economy is one of the biggest benefactors of open markets — and in urgent need of the kind of investments Draghi advocates. Volkswagen’s announcement last week on the potential shuttering of factories there made the challenges tangible.
 

“Don’t lie to yourself,” Draghi said in Brussels on Monday, addressing critics in the region. “Do this, or it’s a slow agony.”

Even in German business circles, there’s a lack of consensus on what to do. Tanja Gönner, the director of BDI — a leading industry lobby group — is calling for a big investment push to deliver economic security, financed via the EU. But her counterpart at the machine-makers association isn’t so convinced.  
 

“We doubt whether joint debt for public funds is the right way forward,” said Thilo Brodtman. 
 

Clemens Fuest, president of the Ifo institute whose business survey has long been a thermometer of Germany’s economy, largely agrees. He says that Draghi’s diagnosis of Europe’s problems is “correct,” but that Lindner’s objections to joint borrowing are exactly what’s needed right now.
 

“Many of the necessary reforms are feasible without additional money,” he said. “Once they’ve been completed and there’s a political will to do more for competitiveness and growth, we can talk about more joint resources.”
 

--With assistance from Jorge Valero and Alexander Weber.
 

(Updates with DIW’s Fratzscher in 16th paragraph.)

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