Pressure on Germany to back bonds

PRESSURE mounted on Germany yesterday to agree to a measure that would help rescue the eurozone from the crisis threatening to engulf the entire currency.

Today Commission President Jose Barroso will unveil details of his wide ranging measures to, on the one hand, strengthen surveillance of national budgets while, seen as a quid-pro-quo, three proposals for different types of eurobonds.

Economics Commissioner Olli Rehn was in Berlin yesterday warning that while Germany has been doing very well, its growth drops to just 0.8% next year, recovery in Europe comes to a virtual standstill.

This theme was repeated in some German media pointing out that cutting their debt from 81% to the 60% required by the EU’s rules within ten years will need government surplus of at least 2% a year, while it’s forecast to be less than 1% next year — less than Italy’s.

Mr Rehn said stability would form the core principle of economic governance in the EU with Mr Barroso’s proposals added to his own new powers that allow him oversight of national budgets and to act against countries breaching the rules.

These will be reinforced by measures to be announced by Mr Barroso today that will demand draft budgets be with the Commission by mid-October, that they be made public, and that the Commission can ask for revisions to be made if they are judged to fall short of meeting any of the budget targets.

It also tightens up the rules for countries that need to access any funds from the EU, including ensuring member state investments in indebted eurozone states are repaid. He will propose placing countries in a type of administration where their running would be virtually taken over, or alternatively making interest payments senior to other debt.

Because the sovereign debt crisis has deepened however, other measures will be necessary, Mr Rehn said, introducing the stability bonds which will be outlined officially today.

This Green Paper will lay out three alternative eurobonds — the first would replace all national issuance under a joint and several guarantee, the second a partial substitution, both of which would require Treaty change. The third would be a partial substitution of national bonds under several guarantees and could be implemented more swiftly.

Mr Barroso is expected to propose launching a broad consultation to close in early January and decide on the best option by February.

The hope is that if EU leaders agree to this at their December 9 summit, the markets will pull back. The International Monetary Fund’s (IMF) announcement of liquidity lines should provide liquidity to eurozone countries having problems raising money on the markets at sustainable rates, such as Italy, buying about six months time for a more permanent solution such as eurobonds.

As Austria’s central bank told three of its banks to pull back its lending, French President Nicolas Sarkozy said he will be making proposals on greater economic and fiscal convergence to German Chancellor Angela Merkel.

France favoured giving the European Financial Stability Facility (EFSF) a banking licence, allowing it to access unlimited money from the ECB. Germany shot down this idea.

Instead Germany favoured arranging for the EFSF to leverage up to €1 trillion by using part of its fund as a guarantee for investors from outside Europe. This has not gained acceptance from potential investors.

Ms Merkel has said the time for a debate on eurobonds has not yet arrived. “I do not think it is right to have it now, in the middle of the crisis”, she said adding that in the long term it was not the answer at any rate.

But Mr Rehn said: “Either we can give in to populist voices and risk losing all we have achieved in fighting the crisis... Or we can choose to work together and take responsible decisions to conquer the financial turmoil, reinforce our economic governance, and turn the downturn into a lasting recovery.”