Eurobonds could stop the downward spiral

The German government doesn't think eurobonds will help Europe out of its debt crisis, but it's high time Chancellor Merkel gave up her stubborn resistance to them. A commentary by Marcus Gatzke from ZEIT ONLINE.

Eurobonds could stop the downward spiral
Photo: DPA

It was surprising news. The Welt am Sonntag newspaper reported this Sunday that the German government was ready to accept the introduction of jointly issued eurozone bonds to save the currency union.

“Preserving the eurozone with all its members is the absolute priority for us,” the paper quoted government sources as saying.

Was this a dramatic U-turn in Berlin’s policy on Europe’s current crisis? Chancellor Angela Merkel immediately despatched her spokesman Steffen Seibert to deny the report, but the truth is it’s high time that Germany give up its resistance to eurobonds – which ease borrowing for heavily indebted countries like Greece while raising costs for more fiscally sound eurozone members.

Why? Because Germany simply cannot go on perpetually bailing out Europe’s ailing economies. Every time EU leaders implement a measure to ease the crisis in one country, it flares up somewhere else – this is clearly an unsustainable situation.

Eurobonds could stop the downward spiral. They would ensure that countries were no longer responsible solely for their own financial liabilities. Instead, the entire eurozone as a whole would guarantee the majority of the debt. The result would be a huge cut in interest rates, and – so it is hoped – the creditors would regain their confidence in the euro.

The criticism that eurobonds would finally seal Germany’s position as the paymasters of Europe does not bear much scrutiny. It is by no means a given that Germany would have to pay markedly higher interest on its debt after the introduction of common debt instruments.

The eurozone’s debt level measured against its economic power is significantly lower than that of the United States, yet US government bonds continue to have extremely low interest rates, despite the recent downgrading by the credit ratings agency Standard & Poor’s.

It’s too simplistic just to average the current interest rates of all national bonds and use that as the standard for future eurozone rates.

But those demanding eurobonds, as a few of the euro’s crisis states are, need to be clear about the consequences: relinquishing complete national sovereignty in financial policy would be crucial.

Brussels would have to make sure that member states keep their finances under control, and would have to wield all the power necessary to ensure just that. Indeed, at the weekend German Finance Minister Wolfgang Schäuble made this a condition of any introduction of common government bonds.

It would also be worth considering forcing every eurozone member to enshrine a debt limit in its constitution – as is the case in Germany.

If this happened, Germany, as the currency area’s strongest economy, would have the opportunity to decisively influence the economic architecture of Europe. At the end of the day, the Europeanization of financial policy would have more effect on the economically weaker countries in southern Europe than it would on Germany.

Those nations would be forced to accept sustainable fiscal policies on a permanent basis. And eurobonds would in no way render economic reforms and budget cuts in Greece, Portugal, Italy and France superfluous – quite the contrary, issuing joint bonds would only reinforce the need for them.

This editorial was published with the kind permission of ZEIT ONLINE, where it originally appeared in German. Translation by The Local.

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German cabinet agrees record levels of new debt for 2021

The German government agreed Wednesday to take on record borrowing this year to weather the economic blow of the coronavirus pandemic.

German cabinet agrees record levels of new debt for 2021
Finance Minister Olaf Scholz. credit: dpa | Kay Nietfeld

In budget adjustments signed off by Chancellor Angela Merkel’s cabinet, Europe’s largest economy will borrow a total €240.2 billion in 2021, a third more than initially planned.

The adjusted budget, which will see Berlin break its taboo on new debt for the third year in a row, still has to be approved by parliament.

“We have decided to suspend the debt brake once again, and I think that’s justified,” Merkel told the Bundestag lower house, adding that the budget was “measured” despite “more insecurity” than usual.

“We are taking the right measures to manage the economic and financial effects of the pandemic,” added Finance Minister Olaf Scholz.

After maintaining a budget surplus for the last decade, the economic slump caused by the pandemic has forced Berlin to take on €370 billion in new debt in 2020 and 2021, with an extra €85.1 billion planned for 2022.

With the country facing a dangerous third wave and shutdown measures extended into April, Germany’s recovery has proved slower than expected this year.

Having originally planned to halt borrowing in 2022, the government is now aiming to return to its golden rule of fiscal discipline a year later, with only €8.3 billion of new debt in 2023.

The so-called “debt brake” is a rule enshrined in the constitution which forbids the government from borrowing more than 0.35 percent of gross domestic product (GDP) in a year.

READ ALSO: Merkel admits Easter coronavirus shutdown plan her ‘mistake alone’

Germany smashed the taboo in 2020 and 2021 as it scrambled to shield businesses and workers from the economic hit of the coronavirus.

The state has already paid out more than 114 billion euros of financial support to businesses since the beginning of the pandemic in the form of guaranteed loans, direct aid and shorter-hours work schemes.

Yet according to a report published by the German Economic Institute on Wednesday, the crisis has still cost the German economy 250 billion euros so far.

Extended restrictions

Hopes of a recovery this year have been dashed with entire sectors of the economy idled for months and the government revising down its 2021 growth forecast to three percent in January.

As a third wave of the pandemic tears through Europe, Germany extended shutdown measures by another several weeks at a marathon meeting between Merkel and state premiers on Monday.

Though plans for a strict five-day lockdown over Easter were scrapped Wednesday, businesses such as non-essential shops, leisure facilities and cultural venues will still remain largely closed until at least April 18.

In a report published Monday, the Bundesbank central bank predicted that restrictions would see economic output “contract markedly” in the first quarter of 2021.

The measures have also been met with growing frustration from business organisations, with the German Commerce Association warning that 120,000 shops could be forced to close if the measures continue to drag on.

The issue of taking on new debt, meanwhile, has also sparked heated political debate ahead of a September general election.

In January, Merkel’s chief of staff Helge Braun caused a major ruckus within his own CDU party when he suggested that the rule on fiscal discipline should be lifted for several years to come.

SEE ALSO: ‘We have finances well under control’: Germany takes on less debt than expected in 2020