August 15th, 2011
05:30 PM GMT
London (CNN) - "The name’s bond, euro bond."
It may not have the same cache as 007 but the joint eurozone bond is fast emerging as the weapon of choice for tackling a debt crisis that has gripped the eurozone for the past 18 months, and brought some member states to the brink of disaster.
As French President Nicolas Sarkozy and German Chancellor Angela Merkel hold crunch talks in Paris this week, investors are betting the only way of calming the region’s markets now is to pool the bloc’s bonds.
For the lack of fiscal cohesion is the fundamental issue facing the 17 nations that share the euro.
Yes, they may have a monetary union but without the same budgetary rules the markets do not view them as one.
The result: Countries like Italy have to pay more than 5% yields to borrow for ten years while Germany need only fork out 2.3%.
And as that spread grows, so too does the difference in opinions between those eurozone members that spend freely and the more prudent nations, who after saving for years, are loath to prop up their ‘poor’ cousins.
Even Robert Zoellick, head of the World Bank, has expressed his frustration in no uncertain terms. Speaking at a dinner in Sydney, Australia, he said the events of the recent weeks had caused "many market participants to lose confidence in economic leadership of some of the key countries."
Zoellick said a trend of acting on issues “a day late” had led to a situation where worry “has accumulated and so we’re moving from drama to trauma for a lot of the eurozone countries.”
So are euro bonds the answer?
It depends who you ask. For countries like Italy and Spain, whose yields hovered below 7% recently, euro bonds would indeed be a wonder cure.
Indeed, Italy’s finance minister Giulio Tremonti has said fiscal consolidation across the eurozone should have been a priority long ago.
But it’s hard to see the healthier, larger countries giving up their comparatively cheap access to open market financing.
If you are Germany and you can borrow at 2.3%, why pay more?
And German rhetoric hasn’t been encouraging on this issue. Wolfgang Schaeuble, the country’s finance minister, reportedly told Der Spiegel magazine that “there is no collectivisation of debt or unlimited support.”
What about a compromise?
The eurozone had around $13 trillion of debt at the end of last year, two thirds of which was issued by Germany, Italy and France.
It’s hard to see such huge chunks being re-issued overnight but think tanks such as Bruegel have proposed that euro bonds eventually make up 60% of that figure and the remaining portion in local denominations, whose yields would fluctuate depending on individual issuer’s economic policies—much as they do today.
Some 320 million people use the euro as their common currency. These are people with different jobs, culture, ages, incomes, taxes so it’s hard to see one magic potion to cure distinct ailments.
Countries like Spain have high unemployment and should not be forced to scrap their budget deficits to conform.
Sarzoky and Merkel say it is too early to discuss euro bonds, as the eurozone bloc does not have a unified fiscal framework. But you can bet the topic will be raised in the press conference after their meeting. And if the politicians don’t address it soon, the markets may well force the issue.
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