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European Commission: Financial Crisis Could Be Staved Off By Issuing Eurobonds

European Commission Financial Crisis

RAF CASERT   11/21/11 10:41 AM ET   AP

BRUSSELS — The European Commission chief said Monday he wants to introduce eurobonds issued jointly by the 17 euro nations as an effective way to tackle the financial crisis, an idea that puts him on a collision course with German Chancellor Angela Merkel.

Jose Manuel Barroso said a eurobonds plan makes sense if linked to fiscal rigor among the member states sufficiently stringent to make it impossible for profligate nations to live on the back of budget-conscious countries.

Germany has opposed the principle of eurobonds since it would expose its taxpayers to the bad debt of weaker countries. As Europe's largest economy, Germany already funds the bulk of the existing bailouts.

Still, Barroso said he and the Commission "are going to put those ideas forward" on Wednesday.

In a study that was leaked to the press and is due to be presented Wednesday, the Commission said replacing national bonds with one jointly-backed bond would be the most effective way to tackle the financial crisis.

Barroso insisted that any such plan would have to be matched by tight financial and budgetary coordination.

"We need more discipline in the euro area because we are in the situation today ... because of lack of discipline, because governments of Europe did not respect their commitments," he said, with Greek Prime Minister Lucas Papademos standing at his side.

Since Greece pushed the eurozone into its ever-worsening financial mess last year, many member states have seen their cost of government borrowing rise to record levels. Germany's borrowing rates, meanwhile, have dropped sharply as investors buy up its bonds as a safe haven. That has created a huge imbalance in debt markets within a zone ruled by one currency.

Germany has long been reluctant to bail out member states like Greece, Ireland and Portugal, insisting it was up to their governments to live by sound economic principles and win investor confidence.

The German government made clear that it wasn't budging on its opposition to the idea of eurobonds as a quick-fix solution to the crisis.

"The chancellor and the German government do not share the belief of many that eurobonds would be a kind of cure-all for the crisis now," said Chancellor Angela Merkel's spokesman, Steffen Seibert.

"They see a danger that such eurobonds could distract from ... laying bare the roots of the problems and ensuring that things improve," he added.

The euro situation worsened dramatically over the past weeks, when Italy was put under such intense market pressure that Prime Minister Silvio Berlusconi had to resign to make way for a government of experts led by former EU commissioner Mario Monti.

As the EU's third-largest economy with debt approaching euro1.9 trillion ($2.5 trillion) and 120 percent of its gross domestic product, Italy is seen as too big to bail out. Faced with a breakup in their currency union, the euro nations have been scrambling for new solutions.

The eurozone currently has a bailout fund, the so-called EFSF, but it still lacks the firepower and nimbleness to support Italy's finances if it were to be frozen out of bond markets.

The European Central Bank for now is limiting bond market pressures by buying up the government bonds of weak countries like Italy. That has helped keep Italy's key borrowing rates below the crucial 7 percent threshold that has eventually caused Ireland and Portugal to need bailouts.

But the ECB says its bond purchases are limited and temporary. To materially lower eurozone borrowing rates to sustainable levels, the ECB would have to embark on a massive program of bond purchases.

Germany – and the ECB, which is heavily influenced by Berlin's policies – opposes such a massive bond program, saying it is up to governments to get their finances straightened out.

As a result, the EU study is pushing for eurobonds – or Stability Bonds, as it calls them – instead of national bonds as the best way to avoid financial disaster.

"In this way, the severe liquidity constraints currently experienced by some member states could be overcome and the recurrence of such constraints would be avoided in the future," the draft of the study said.

It said that eurobonds would "provide the global financial system with a second safe-haven market of a size and liquidity comparable with the U.S. Treasury market."

It would be politically difficulty, however, to impose the same fiscal rigor across the 17 euro nations and fundamentally change the balance of power between the European Union and the national capitals.

The draft says that such fundamental changes would "almost certainly require" changes in the treaty underpinning the EU. In the past, any treaty change has proven to be a tough political task.

Italy's Premier Mario Monti will visit EU headquarters on Tuesday to discuss similar issues. On Thursday, Monti is to join German Chancellor Angela Merkel and French President Nicholas Sarkozy in Strasbourg for what he calls a permanent club of the eurozone's three largest economies to confront the debt crisis.

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Geir Moulson in Berlin contributed to this report.

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Filed by Jillian Berman  |