All for one, one for all! Such is the musketeer oath logic behind a growing chorus of voices calling for an expansion of the bailout fund, launching a Eurobond, or even an outright transfer of money to debt-stricken nations. Only through debt mutualization will the euro (read the EU) be saved, say the musketeers. The economic logic seems compelling. With a Eurobond, the entire eurozone would guarantee the value of, say, an otherwise risky Italian bond, and thus the borrowing cost for Italy would fall drastically. But how likely this and other steps toward true fiscal and political union in the EU?
The point could be made that the EU already has developed into a transfer union. Irish, Greek, and Portuguese citizens would surely have a solid case when arguing that they no longer control their economic future. In exchange for capital provided by the European Central Bank (ECB), and by member countries via the bailout fund, political autonomy was bartered away to Brussels. Arguably, the only difference between outright transfers, and using the ECB and bailout funds as transfer vehicles, is that the taxpayers will not foot the bill until the bailout recipients default.
According to this view, Merkel and Sarkozy’s latest prodding of the ECB to buy Spanish and Italian bonda is just the latest cash transfer to teetering economies. The ECB’s increasing involvement in the sovereign bond market is viewed by some, such as Bundebank chief, Jens Weidmann, as a clear violation of the ECB’s mandate. In Weidmann’s view, the ECB is now operating in political territory, intervening in national fiscal policy, instead of maintaining its political independence and solely focusing on maintaining price stability. The purchasing of bonds no one else wants puts the ECB at risk, and needless to say, the same goes for the national central banks that support the euro.
In spite of these pretty radical interventions by the ECB, the main players seem to have balked at an outright mutualization of European debt. Thus, Merkel and Sarkozy’s recent talks seemingly shut the door on the Eurobond option. Perhaps this is merely Merkel and Sarkozy preferring the politically less costly option of using the ECB as a transfer vehicle. Clearly, net payer countries’ electorates are ready to punish leaders who seem eager to bail out the deadbeats. Importantly, the economic logic underlying the more populist strains of anti Eurobond sentiments is that Eurobonds will make fiscal discipline a very uncomfortable alternative, when compared to cheap loans.
For now at least, the net payers are demonstrating a limited willingness to throw in their lot with debt stricken nations. However, the euro is the EU’s most significant achievement, and Europe’s leaders will fight to hold it together. Perhaps, as has been the case in earlier times of crisis, the EU will fall forward, when the only other alternative is falling on it’s a.., and take significant steps toward fiscal union. On the other hand, judging from Finland and other countries’ demands for collateral for any further loans, the ratification of the crisis measures in national parliaments of crisis measures adopted on the EU level is no longer a sure thing… Come September, when, or rather if, the permanent bailout mechanism takes over the role of the ECB, we shall see whether these crisis measures are enough to save the euro. If not, the EU could face a musketeer moment, where the wealthier nations must accept that in a single currency there are no half measures.