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Published on July 9th, 2012 | by Katharina Obermeier
Image © [caption id="attachment_10688" align="alignnone" width="566"] ©World Economic Forum[/caption]   German Chancellor Angela Merkel caused a stir in European policy circles recently by declaring “I don’t see total debt liability as long as I live” – strong words for a politician caught in a continent-wide financial crisis. The statement surprised even her German colleagues, most of whom have been among the eurozone’s most ardent opponents of any type of debt mutualisation. Was this a demonstration of German strength, or a further example of Merkel’s stubbornness and inability to take the actions necessary to save the eurozone? The term “total debt liability” refers to eurobonds, of course, the concept of pooling the debt of all eurozone countries and issuing joint bonds amongst them. Essentially, this is a way for the eurozone overall to provide guarantees on the debt of its members, meaning greater investor confidence in these bonds than in those held individually by Greece, Italy and Spain. It would also harmonise borrowing costs for governments across the eurozone, facilitating access to loans for those countries that really need it. Economists, most eurozone member states, the European Commission and the European Parliament all see the establishment of eurobonds as a vital instrument to strengthen the eurozone against financial crises, current and future. So why are Merkel and her administration so hostile towards this idea? In a speech she delivered recently at the German Parliament, Merkel argued that eurobonds were “economically counterproductive” because they undermined European competitiveness. Clearly, she either meant German competitiveness or has not realised the full extent of the crisis. Strategies to improve competitiveness are important in the long term, obviously, but are not really helpful to countries such as Greece and Spain teetering on the very edge of bankruptcy. To the unemployed youth of Europe, the prospect of heightened European competiveness in fifteen years’ time would no doubt be cold comfort in the face of an on-going economic crisis. The German Chancellor also insisted that “shared liability [for debt] cannot occur until sufficient control has been assured.” This must have puzzled international observers who had been under the impression that the whole point of the fiscal compact pushed so hard by Germany was to establish this kind of control over budgets. The compact has been signed by 25 EU member states, including all eurozone member states, meaning that, by Merkel’s own arguments, shared liability should no longer be a problem. The third argument the Chancellor employed is perhaps the most unfortunate: she pointed out that the debts of German Länder (states) were also not mutualised at federal level (even though Germany does issue bonds at this level). Ironically, debt mutualisation is exactly what German Länder demanded – and received – in exchange for ratifying Merkel’s fiscal compact, effectively invalidating that argument. However misguided Merkel’s administration appears to be, it would be unfair to lay the blame for this obstinacy solely on the current regime. The idea of eurobonds is not popular among the German population, in whose mind any type of inflation or currency depreciation is an evil forerunner to destructive hyperinflation and who view “lazy Southerners” as responsible for their own problems. More important, perhaps, are the political alliances on which Merkel’s administration rests. Horst Seehofer, the leader of Merkel’s Bavarian sister party, recently made remarkably short-sighted threats to withdraw his support from the government if it makes further concessions to indebted eurozone members, demonstrating the federal government’s difficult position. Of course, by its very nature, providing guarantees for someone’s debt is an enormous responsibility. In any other situation, Merkel’s opposition would be understandable on these grounds. However, the German chancellor once again seems to have failed to grasp the magnitude of the problem with which Europe is grappling, and is opting for the politically safer route of muddling her way through the crisis, doing just enough to prevent actual state bankruptcies but unwilling to put in the commitment necessary to develop real solutions.

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“As Long as I Live”: Germany’s Fight against Eurobonds

©World Economic Forum

 

German Chancellor Angela Merkel caused a stir in European policy circles recently by declaring “I don’t see total debt liability as long as I live” – strong words for a politician caught in a continent-wide financial crisis. The statement surprised even her German colleagues, most of whom have been among the eurozone’s most ardent opponents of any type of debt mutualisation. Was this a demonstration of German strength, or a further example of Merkel’s stubbornness and inability to take the actions necessary to save the eurozone?

The term “total debt liability” refers to eurobonds, of course, the concept of pooling the debt of all eurozone countries and issuing joint bonds amongst them. Essentially, this is a way for the eurozone overall to provide guarantees on the debt of its members, meaning greater investor confidence in these bonds than in those held individually by Greece, Italy and Spain. It would also harmonise borrowing costs for governments across the eurozone, facilitating access to loans for those countries that really need it. Economists, most eurozone member states, the European Commission and the European Parliament all see the establishment of eurobonds as a vital instrument to strengthen the eurozone against financial crises, current and future. So why are Merkel and her administration so hostile towards this idea?

In a speech she delivered recently at the German Parliament, Merkel argued that eurobonds were “economically counterproductive” because they undermined European competitiveness. Clearly, she either meant German competitiveness or has not realised the full extent of the crisis. Strategies to improve competitiveness are important in the long term, obviously, but are not really helpful to countries such as Greece and Spain teetering on the very edge of bankruptcy. To the unemployed youth of Europe, the prospect of heightened European competiveness in fifteen years’ time would no doubt be cold comfort in the face of an on-going economic crisis. The German Chancellor also insisted that “shared liability [for debt] cannot occur until sufficient control has been assured.” This must have puzzled international observers who had been under the impression that the whole point of the fiscal compact pushed so hard by Germany was to establish this kind of control over budgets. The compact has been signed by 25 EU member states, including all eurozone member states, meaning that, by Merkel’s own arguments, shared liability should no longer be a problem. The third argument the Chancellor employed is perhaps the most unfortunate: she pointed out that the debts of German Länder (states) were also not mutualised at federal level (even though Germany does issue bonds at this level). Ironically, debt mutualisation is exactly what German Länder demanded – and received – in exchange for ratifying Merkel’s fiscal compact, effectively invalidating that argument.

However misguided Merkel’s administration appears to be, it would be unfair to lay the blame for this obstinacy solely on the current regime. The idea of eurobonds is not popular among the German population, in whose mind any type of inflation or currency depreciation is an evil forerunner to destructive hyperinflation and who view “lazy Southerners” as responsible for their own problems. More important, perhaps, are the political alliances on which Merkel’s administration rests. Horst Seehofer, the leader of Merkel’s Bavarian sister party, recently made remarkably short-sighted threats to withdraw his support from the government if it makes further concessions to indebted eurozone members, demonstrating the federal government’s difficult position.

Of course, by its very nature, providing guarantees for someone’s debt is an enormous responsibility. In any other situation, Merkel’s opposition would be understandable on these grounds. However, the German chancellor once again seems to have failed to grasp the magnitude of the problem with which Europe is grappling, and is opting for the politically safer route of muddling her way through the crisis, doing just enough to prevent actual state bankruptcies but unwilling to put in the commitment necessary to develop real solutions.

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About the Author

Katharina Obermeier

Katharina considers herself a German-Canadian hybrid. She grew up in Germany and completed her BA in International Relations at the University of British Columbia in Vancouver, Canada. Politics, especially in relation to concepts of nationality, have always fascinated her, and she is particularly interested in international political economy. During her studies, she was an avid participant at Model United Nations conferences, and helped welcome international exchange students to her university. She is currently completing an internship at a Brussels-based trade association and hopes to work in European affairs in the future. In her political writing, Katharina marries social democratic principles with a keen interest in the European Union and its implications for European politics and identity. She writes to counteract simplistic ideas about politics and economics, continuously attempting to expose the nuances and complexities involved in these subjects.



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