Eurobond plan exposes huge political divisions

NEW divisions have emerged between eurozone leaders over how to solve the economic crisis after European Commission president Jose Manuel Barroso called for the creation of a new eurobond.

The idea was welcomed by financial experts as the eurozone continues to threaten to collapse, with the Greek and Italian economies still teetering on the brink despite new governments being sworn in.

However, the proposal was opposed by Germany, the country underpinning the eurozone, amid fears that eurobonds – which would be issued jointly by all 17 members of the eurozone allowing them to raised funds – could spread the contagion further.

German chancellor Angela Merkel insisted ambitious European Commission ideas in a green paper offered the wrong remedy at the wrong time and made it clear she would not support them.

Netherlands finance minister Jan Kees de Jager said eurobonds were no magic solution to the crisis “and could even worsen it”.

But Mr Barroso said: “The crisis has shown that, without stronger governance in the euro area, it will be difficult, if not impossible, to sustain a common currency.”

Now, therefore, was the time to produce eurozone proposals which, he acknowledged, would be “difficult to accept in good times”. Eurobonds would be part of the answer to the crisis, helping establish economic governance, discipline and convergence in the euro area, he said.

“Stability bonds will not solve immediate problems, but show to public opinion that we are serious … implemented in the right way, the joint issuance of debt in the euro area could bring tremendous benefits. It could lead to greater financial integration and to the creation of a much larger and more liquid bond market – comparable to that which exists for United States Treasuries.”

On tighter controls on eurozone national budgets, Mr Barroso said: “Under the new rules, the commission will have greater surveillance powers, so that we do not face again the situation where failings in one country endanger the stability of the euro area as a whole.”

He added: “National budgets will, of course, be prepared by governments and voted on by national parliaments. Parliaments will, of course, have the final say.

“The difference with the current system is that the commission will have the right to issue an opinion and may request changes. National parliaments will, for the first time, have the full information on all other countries in the euro area. We must not oppose the national democratic process to the European democratic process. We need both.”

One leading Czech politician argued that the proposal called into question whether his country should keep to its commitment to join the euro.

The options for eurobonds and the economic governance package both “miss the point”, according to Jan Zahradil, leader of the European Conservatives and Reformists group – which includes the UK Tory MEPs – in the European Parliament.

He said: “Instead of fiddling with economic governance structures and abstract debates about whether we need ‘more Europe’, the EU needs to start focusing on the immediate crisis.”

The UK government kept out of the eurobonds exchanges yesterday, but a spokesman said: “We’ve been clear that the eurozone has to face up to its responsibilities and that both the individual members of the eurozone and the institutions need to find a sustainable solution to the current crisis, but it is not for us to dictate how they do this.”

But Conservative MEP Kay Swinburne, the party’s spokesman in the European Parliament on economic and monetary affairs, warned that eurobonds could be a disincentive for governments facing economic turmoil to make tough but vital financial decisions.

“The danger is that struggling nations currently walking an economic high wire will see the bonds as their safety net. They may just continue taking risks because they believe the more stable economies will catch them when they fall. That is not a recipe for stability – it spells more strife, turmoil, trouble ahead. Creating more debt is not the way out of a debt crisis.”

However, there was support for the idea on the financial markets where traders are looking for decisive action from Europe’s political leaders.

Simon Lewis, chief executive of the Association for Financial Markets in Europe, said the eurobond plan could attract investors back to the sovereign debt market and reduce the cost of borrowing for member states, thus easing the burden on taxpayers in the 17 eurozone countries.