For anyone betting on a sovereign default in the euro zone, the political odds just keep getting shorter. Never mind bond prices; the financial markets have already delivered their verdict about the solvency of Greece and Ireland. What matters now is whether euro zone politicians will put aside national self-interest and merge their economic destinies in a credible framework within which the weak states can work out their debt problems while protected and disciplined by the stronger members. In shorter words, will the euro zone finally put the E ("economy") into EMU?
Unfortunately, more political discord erupted on Monday. Two prominent EU politicians - Jean-Claude Juncker, the prime minister of Luxembourg and the Italian finance minister Giulio Tremonti, set out their prescription: E-bonds.
These joint sovereign bonds, issued by a central debt agency would finance up to half of the debt requirement of euro zone members, even more for states with solvency problems. Holders of existing sovereign euro zone bonds would be able to switch at par value to E-bonds with a discount depending on market perception of issuer stress. Any profit from the conversion would accrue to the issuing debt agency, thus reducing the cost of E-bond issuance, a bonus for euro zone taxpayers anxious about the cost of sovereign bailouts.
It's a possible solution to the problem of fund-raising by weak economies bound to the strong single currency. But even as the two euro zone politicians published their proposal in Monday's Financial Times, Germany was pouring cold water on the idea. Wolfgang Schauble, the German finance minister pointed out that the EU treaties would have to be amended to allow such collective debt issuance. But his technical objection to E-bonds is disingenuous. Of course, there would be have to be unanimous agreement to the creation of such a powerful supranational institution as a European sovereign debt agency. The question is whether the principal loser from such an arrangement - Germany - is prepared to pay the price for credit market stability in the euro zone.
One consequence of the creation of E-bonds must be some loss of Germany's debt-pricing advantage. An E-credit rating for the entire zone, including, Greece, Spain, Portugal and Ireland would, one has to presume, be lower than Germany's rating. Why, then, would Germany choose to fund itself more expensively with E-bonds than by issuing bunds?
Germany would only do this if it agreed to a fiscal union rather than a mere monetary union. We are a long way from that as Mr. Schauble said on Monday: "We have a common monetary union but we don't have a fiscal union. We need to convince the the international public and international markets that this is ia new form, very specific to meeting the demands of the 21st century."
It's a new form, but it doesn't appear to work very well. That doesn't worry Germany, and its unwillingness to acknowledge the failure is compounded by domestic content. Its economy is motoring: German exports are going gangbusters and employment is increasing, thanks to the weakness of the euro. Consumer spending is rising and debt is cheap, thanks to fiscal autonomy. What is not to like?
Unfortunately, there could be a lot to dislike if the current impasse ends up in a cascade of bank defaults followed by a sovereign default that crippled several of the weaker economies. Even for those states which remain smugly outside the euro zone, such an outcome is worrying.
Earlier this year, says WikiLeaks, Mervyn King, the governor of the Bank of England expressed his concern about Britain's potential isolation if the EU moves to closer economic cohesion. In a way, Britain is damned if it does and damned if it doesn't. Economic union will exclude Britain from key EU decisions but failure to unite could lead to an economic failure of some of the U.K.'s biggest customers and that would be as disastrous for Britain as it would be for Germany.
Carl Mortished