Yes or no to Eurobonds?

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Billionaire US investor George Soros gave an interview  to German Magazine Der Speigel yesterday in which he outlined his thoughts on the European Crisis. I have included the full interview transcript at the bottom of this post. In the interview Soros was scathing about the lack of leadership across Europe claiming that:

“The politicians have not really tried to fix any crisis; they have so far only tried to buy time.”

Soros also states that European nations, namely Germany, have no choice left to them if they want to keep the Euro machine together.

I think there is only one choice. It is not a question of whether Europe needs a common currency. The euro exists, and if it were to break apart, all hell would break loose. Germany has to make it work. To make it work, you have got to allow the members of the euro zone to be able to refinance the bulk of their debt on reasonable terms. So you need this dirty word: “euro bonds”. But when you study what it involves to have euro bonds, you really have a problem because each European country remains in control of its own fiscal policy, and you have to rely on the country to meet its financial obligations.

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Soros goes onto describe what sounds to me to be a complete fiscal union. He also makes comment about something I have spoken about previously. The need for indebted countries to deal with their productivity first before applying budgetary austerity.

That is why you need to establish fiscal rules that will ensure the solvency of every member. This should make the euro bond acceptable to German voters. Europe needs a fiscal authority that has not only financial but also political legitimacy. The difficulty is agreeing on the rules. Unfortunately, Germans have some funny ideas. They want the rest of Europe to follow their example. But what works for Germany can’t work for the rest of Europe: No country can run a chronic surplus without others running deficits. Germany must propose rules that other countries can also follow. These rules must allow for a gradual reduction in indebtedness. They must also allow countries with high unemployment, like Spain, to continue running cyclical budget deficits until they recover.

My readers would be well aware that I agree with this prognosis and I have talked constantly over the last month that Germany was slowly moving itself into this position whether it liked it or not. The big stumbling block in my mind has been whether Germany would accept its new place in Europe under this regime. In the past my answer has always been no and I still hold that opinion today. However I have always thought the true test of that theory would come when the Euro-elite finally jawboned themselves into needing a Euro-bond mechanism to allow Supra-European debt consolidation.

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We now seem to be at that stage. So will the Germans agree?

Yes… and No according to Reuters.

The German government no longer rules out agreeing to the issuance of euro zone bonds as a measure of last resort to save the single currency, conservative newspaper Welt am Sonntag reported on Sunday.

Even though Finance Minister Wolfgang Schaeuble and Economy Minister Philipp Roesler again spoke out against euro zone bonds and debt collectivization, Welt am Sonntag reported the German government is nevertheless considering that and other measures.

“Preserving the euro zone with all its members has absolute top priority for us,” according to a government source quoted in the newspaper under the headline: “Government no longer excludes European transfer union and joint euro bonds as last resort.”

The newspaper, traditionally close to Chancellor Angela Merkel’s Christian Democrats (CDU), indirectly quoted the source adding: “In case of emergency, one would thus even be prepared to accept the introduction of a ‘transfer union’ and at the end of the day even joint euro zone bonds.

“Without these euro bonds, it might no longer be possible to save the euro zone,” the newspaper continued, further quoting the source indirectly. “The path we’ve taken so far with multi-billion rescue packages for financially struggling states is beginning to reach its limits.”

A government spokesman in Berlin declined to comment on the report in Welt am Sonntag but instead pointed to the Schaeuble interview in Der Spiegel news magazine published on Sunday.

Schaeuble said Germany remains against any collectivization of euro zone governments’ debt and creating common euro bonds is impossible while countries run separate economic policy.

“It still stands: there will be no collectivization of debt and there will be no unlimited support,” he said. “There are certain support mechanisms that we are developing further — with strict conditions.”

“The member states that need our solidarity must reduce their deficits and reform their economies — with at times very tough measures,” he said.

Der Spiegel said Schaeuble also ruled out the issuance of eurobonds unless certain hurdles are removed.

“I rule out Eurobonds for as long as member states conduct their own financial policies and we need differing interest rates so that there are possibilities of incentives and sanctions to force fiscal solidity,” he said.

“Without that kind of solidity, there is no foundation for a joint currency,” Schaeuble added.

Economy Minister Roesler also spoke out against euro zone bonds in an interview in Handelsblatt newspaper on Monday: “I consider euro bonds to be the wrong approach in a Europe in which every member state should take responsibility for itself.”

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That reads to me that Germany will accept Euro-bonds as long as other nations give up their rights over their own fiscal policy. So maybe the question isn’t “Will Germany accept Eurobonds?”, maybe the question is “Will the rest of Europe accept Eurobonds under Germany’s rules?”.

I think that is a step too far, even for the most indebted nations. If I am correct about that then the European Crisis is far from over.

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