Forty three years since former French President, Charles de Gaulle vetoed Britain’s membership of the Common Market for a second time with the immortal word ‘non’ German Chancellor, Angela Merkel is saying ‘nein, danke’ to the renewed idea of a common European bond. Clearly no longer prepared to be bear what is seen as an oversized burden for the failure of others Germany is slowly but surely attempting to put its taxpayers first. Without German participation the idea of issuing a common European bond and that would, had it ever have been allowed to see the light of day, have been required to be guaranteed by all Eurozone members will go back on the shelf that it has rested for the best part of the past eleven years. Whilst there is very little doubt that the issue of a common European bond could well have solved the shorter term sovereign debt problem of the Eurozone economy without the biggest paymaster and ‘Lord Protector’ as a contributor the idea is dead. Merkel’s stance is yet another sign to me that the concept of a single currency in Europe is now fully in regression. Perhaps we should not be quite so surprised that Germany has pulled down the shutters. Indeed, given the seriously weak status of several Eurozone member states right now in terms of massive budget deficit and the subsequent build up of unacceptable levels of national debt those that believe Mrs. Merkel is putting at risk the larger EU wide economy better ask themselves first why should a country like Germany that has conducted its wider economic affairs in a fully disciplined manner observing all rules of deficit, debt and even trade balances be expected to act as principle paymaster for the rest?
In taking such a hard line stance against the idea of a European bond Mrs. Merkel has set out on a mission to ensure that as best as possible Germany ring fences itself from wider affects of the sovereign debt crisis that has been created by other far less disciplined members of the Eurozone. With the bail out issue high on the subject list of a great many German lips today we should perhaps not be that surprised that Mrs. Merkel has read the political nuances of German voters correctly before deciding that enough is enough. It is a fair point too – why apart from an old and now failed idea that introduction of a single currency right across the EU would if it was also done alongside full political union provide the financial stability required should one nation that subsequently observed all the rules be expected to pay such a high price to bail out other far less scrupulous member states.
In the meantime and just as non Euro Britain has done we believe that Germany will for now continue to accept any remaining responsibilities that it has within the wretched Lisbon treaty.
Whilst the idea of a European bond is not particularly new it is clear to most that without German participation it is a non runner. In a further attempt to isolate the German economy and probably its bond market from further potential backlash from the sovereign debt crisis Mrs. Merkel is expected to formally reject calls from the International Monetary Fund that finance ministers should agree to increase the size of the existing EUR750bn European Stability Fund.
Far more difficult to judge will be what further potential negative affect this will have on the already battered Euro. Gradually and noticeably rating agencies are marking down the debt of the most troubled Eurozone member nations. In terms of the IMF requests it seems that the official line from European finance ministers is that having bailed out Greece and Ireland there is ample remaining funds should they be needed. In any case the view appears to be that markets should get real and see that the deficit problems in Spain and Portugal have now or very soon will be sufficiently contained and that neither nation will need additional support. Contagion fears though do not disappear just like that. In any case, even had the idea of a European bond been turned to reality whilst their can probably be little doubt that the immediate sovereign debt crisis would have quickly subdued there would be plenty of us around to remind that eventually there would still be a heavy price to be paid. At some point debt has to be paid off and to achieve that in some of the worst countries affected requires far more growth than any are likely to achieve over the next ten years. Neither should we lose sight that the objective of monetary union was first and foremost stability that would be achieved by all members obeying set in stone rules that limited budget deficits, national debt and if at all possible, trade deficits too.
Could a so called e-bond have worked? Certainly it could and I am in no doubt whatsoever that there would be plenty of takers for such a bond either. Indeed, I would even include China and some other fast emerging eastern economies as being potential sovereign state buyers of such bonds. But the problem with any instrument such as this and that some would like to believe could act as a force to bind the larger part of Europe closer together is that there always needs to be full political union to make it work. Right now there is certainly no desire for that neither on the political front or voters that they represent.
Whilst 2010 isn’t quite over yet one doubts that there will be further sovereign debt fireworks until early next year. Relying on the votes of two independents the Irish coalition government should today with any luck pass its austerity budget with a majority of just one. Don’t worry, one is enough for now and in the circumstances it is the best that could possibly be hoped for. Portugal has also taken stringent measures to tighten spending and at least here we are, unlike Ireland, not staring at a problem made one thousand times worse failing banks. And what about Spain? Well rule nothing in and rule nothing out. Right now no-one really knows whether Spain will need to come to the IMF and European Stability Fund with a large begging bowl or not. What we do known though is that if it does and if the Eurozone authorities speaking as one of course, that if EU finance ministers, presidents and prime ministers fail to agree and that if the IMF should perhaps find itself in an invidious situation that this could be the final test that leads to a Euro split.
