EU: US Condemnation and the Eurobond Solution

Moody credit rating agency downgraded the credit ratings of two of France’s banks, Societe Generale and Credit Agricole, because of their exposure to Greece’s debt, serving to highlight the growing risks of the EU’s financial sector.

Along with the one-notch downgrade, President Barack Obama has also increased pressure on the Euro-zone members to intensify their coordination to solve the rolling debt crisis that has run havoc among the global markets.  The amounting pressure has only added to the confusion that has increased during the Greek situation.  In “EU: Revival of Germany’s Fiscal Darwinism?“, there were numerous reports about the preparation for a Greek bankruptcy and the inevitable conclusion of their expulsion from the Euro-zone, along with all other highly indebted nations.  However, following the reports from allied political organizations to Merkel’s CDU, the chancellor loudly voiced her opposition to such claims, stating the Euro-zone block must stay together.  Merkel has warned that allowing a Greek bankruptcy will lead to a domino effect and that everything must be done to keep the Euro-zone together politically.  In response to the crisis, US Treasury Secretary Timothy Geithner will take an unprecedented step of attending a meeting of the EU finance ministers in Poland on Friday.  He is most likely to urge Europe’s leaders to expedite ratification of changes to the Euro-zone bailout fund, the EFSF, and consider boosting its size.

Just like the news,  the global markets have “yo-yoed” incessantly.  Greece  has serve as the forefront of the Euro crisis but a larger problem is seen in Italy and Spain, two much larger economies which would not be able to be bailed out by relief packages, such as those given to Greece.

“In the end, the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective coordinate fiscal policy.” – Barack Obama, 44th President of the United States

Moreover, China also added its voice to US concerns over Europe’s persistent inability to stop the debt contagion from spreading. The pressure continues to surmount as senior EU and IMF inspectors are due in Athens to check on Greece’s faltering compliance with its bailout plan.  For these reasons, Chancellor Merkel and President Sarkozy have pressed Prime Minister George Papandereou to enforce harsh austerity measure, such as those mentioned in the previous blog.

“Today I want to confirm that the Commission will soon present options for the introduction of eurobonds.  Some of these could be implemented within the terms of the current treaty, and others would require treaty change.” – Jose Manuel Barroso, European Commission President

Meanwhile, the news of downgrade, international skepticism and growing reform pressure has not had the typical effects on global markets.  Rather, meetings to discuss foreign aid and eurobonds has lifted European stocks.  The emerging economies that make up the BRIC grouping: Brazil, Russia, India and China; are to discuss possible financial aid and investment into Europe’s sovereign bonds in next week’s meeting in Washington.  Combined with President Barroso’s announcement that the Commission would soon present option for the issuing of a common Euro-zone bond, the DAX has already gone up 3.44%.  Barroso has said that he would urge the 17 members to issues join bonds, allowing them to borrow money collectively.  Eurobonds have already been backed by Italian Finance Minister Guilio Tremonti and investor George Soros.

Nevertheless, such bonds will and already have faced major political and legal obstacles in Germany and other northern European creditor states.  A German Finance Ministry spokesman has reaffirmed Berlin’s opposition to the idea but said that it awaited the proposals.  Of note is that the stronger nations of Germany and Northern Europe are advent about their opposition while failing economies such as Italy and Greece have pledged full support.  The crisis was started by unchecked spending and borrowing by these nations from the ECB, allowing the nations to dig themselves into this rut.  The possible creation of these eurbonds appears to further integrate the nations into a more interdependent situation, but it also allows such ailing nations to revert back to such high borrowing trends.  This time, however, the borrowing will directly affect strong nations because it allows ailing nations to draw on the others’ resources.  Clearly, nations such as Germany have the right to stand against a plan to potentially weaken their infrastructure, especially considering that much of their sovereignty and authority will be undermined.  So saying, last week’s ruling of the German court, authorizing Bundesbank’s power over future fiscal plans made by Germany, has made it virtually impossible for Berlin to sign up to join eurobonds, even if it wanted to.

In conjunction, the establishment of eurobonds will hopefully serve to illustrate the need to a stronger supranational identity to supervise the actions of Member States.  Olli Rehn, the EU Economic Affairs Commissioner, said that issuing a common Euro-zone bond would require much more intrusive surveillance of member states’ fiscal and economic policies, which would have to be full debated in each individual state.

“To my mind it is clear the eurobonds, in whatever form they were to be introduced, would have to be accompanied with a substantially reinforced fiscal surveillance and economic policy coordination as an essential counterpart so as to avoid moral hazard and ensure sustainable public finances.  Of course this would have implications for fiscal sovereignty of Member States, which calls for substantive debate in the Euroarea Member State, to see it they would be ready to accept this.” – Olli Rehn, European Union Economic Affairs Commissioner.

Besides the general supranational conflict of words that has been underway since the beginning of the crisis, interstate development will be the final vindication or condemnation of the EU.  For instance, Italy’s government used a confidence vote to speed up the process of approving a proposed austerity package.  The government won the vote and the austerity legislation will likely be confirmed by the end of the day.  The government passed the confidence vote with 316 votes in favor and 302 votes against.  The current version of the measure would lower the state’s debt by 54 billion euros, achieved through budget cuts, tax increases, and changes in Italy’s pension system.  Without substantial efforts by these ailing nations to individually subvert the debt contagion, the international efforts will not reach fruition, nor will they be able to control such widespread problems.  With credit markets factoring in a 90% chance of a Greek default on its debts, the actions of Italy must be strong and stable.  Italy is the key to contain the crisis because of its major role in the fiscal system, and the general size of its economy which easily surpassed Greece’s and therefore, would not be viable for bailout.

“This is a fight for the jobs and prosperity of families in all our Member States.  This is a fight for the economic and political future of Europe.  This is a fight for what Europe represent in the world.” – Jose Manuel Barroso, European Commission President

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