European Commission outlines vision for Eurobonds, fiscal integration
EUROPE - The European Commission has outlined its vision for Eurobonds, confirming that the proposals will require closer fiscal integration of the single currency's member states - while also revealing an ambition to compete with the US Treasury.
The publication of the Green Paper on Stability Bonds - the Commission's preferred label for the joint issuance - was seemingly torpedoed by the German government ahead of its release, with both chancellor Merkel and finance minister Wolfgang Schäuble rejecting the idea this morning.
The Commission for Economic and Financial Affairs outlined three potential approaches for the introduction of Stability Bonds - with either a full substitution of national bond issuance or partial substitutions with varying degrees of guarantees suggested.
It admitted that fully substituting all euro-zone debt issuance with stability bonds could necessitate "significant" changes to European Union treaties.
But it argued that, due to its joint and several guarantee system, it would also lead to further integration and improved market stability.
A second option suggested joint guarantees be put in place, but allowing for continued national issuance, while the third option - which the Commission said would have "only smaller effects on stability and integration" - proposed the issuance of Stability Bonds alongside national bonds, but with guarantees from several sources, if not all euro-zone states.
However, the Commission noted that the last option might require member states to provide the collateral and likened it to the European Financial Stability Facility and its issuances to fund the bailouts of a number of EU countries.
The Green Paper sought to highlight the advantages of Stability Bonds by saying they would allow euro-zone members to effectively compete with the US Treasury.
"The US Treasury market and the total euro-area sovereign bond market are comparable in size, but fragmentation in euro-denominated issuance means much larger volumes of Treasury bonds are available than for any of the individual national issuers in the euro area," the paper noted.
It said the highly liquid secondary market for t-bonds contributed to a higher volume of trading, aided by the "privileged" role of the US dollar as the world's reserve currency.
"Accordingly," it said, "the larger issuance volumes and more liquid secondary markets implied by Stability Bond issuance would strengthen the position of the euro as an international reserve currency."
However, the Commission stressed that any joint Stability Bond would have to be accompanied by more cooperation on fiscal and monetary policies between members of the single currency, as the absence of such policies had led to the current crisis.
The Green Paper said: "The high degree of convergence in euro-area bond yields during the first decade of the euro was not, in retrospect, justified by the budgetary performance of the member states."
Speaking in Germany yesterday, European Commissioner for Economic and Monetary Affairs Olli Rehn admitted there was resistance to the idea of joint issuance, but appealed to Germans that all Europeans had a "singular" goal of a better Europe for all.
"For me, it is clear that any type of Eurobonds would have to go in parallel, hand in hand, by a substantially reinforced fiscal surveillance and policy coordination, as an essential counterpart," he said.
"Stability Bonds would require that any step in the further sharing of risk would have to be balanced by provisions that ensure sustainable public finances and avoid free-riding on the consolidation efforts of others."
The Green Paper added that the "acceptance and success" of the bond would depend on its credit rating, with the highest credit rating possible desirable - as investors could otherwise prove reluctant to buy entire issuances.
"This would particularly be the case if member states' national AAA issuance would continue and thereby co-exist and compete with Stability Bonds," the Green Paper said.
Germany's AAA rating is the only one not to be questioned in recent weeks, with speculation surrounding France's ability to retain its high rating - aided by an accidental downgrade from Standard & Poor's earlier this month.
However, questions may now circle around Germany's ability to sell Bunds, after the Bundesbank earlier today failed to sell more than half of its 10-year issuance, not raising the targeted €6bn.