Governments have a unique way to talk about things they don't know, put political content in it, and pretend it is a solution. The political Eurobonds discussed at the Brussels informal Summit this week are based on a political request for more solidarity to the Northern from Southern countries of the Eurozone. They happen to have nothing to do with a financial Eurobonds. The May 23 European summit was no exception to the uselessness of the previous 21.
What President Hollande defended in Brussels is growth as well as austerity, and not only financial discipline. Most people will agree that he was right, even if it is a rather casuistic discussion. The reality, contrary to what US pundits are trying to teach Europe, is that Europe has to stop the ship from sinking while trying to restart the engine of economic growth. There is no alternative.
Let's look at the reality.
Eurobonds already exist.
The EFSM facility (not to be confused with the EFSF facility) amounts to 60 billion euros and is backed by the European budget: it includes solidarity between Member States. It therefore kept its AAA rating.
However, in April, EFSM bonds have been issued for 2.7 billion euros at a rate of interest of 3.87%...2.50% above Germany. European bonds are too complicated, with too many issuers. There is no financial advantage in issuing those bonds.
Eurobonds worsen Eurozone countries indebtedness.
Without any taxing authority, Europe has no financial standing. Its creditworthiness is based on the rating of its Member States. Since France lost its AAA, the majority of those guarantees are lower than AAA. As a result of that EFSF bonds are now rated AA+. Further guarantees will inevitably bear on those ratings, and since one third of countries guaranteeing the Eurozone bonds are in a difficult position, it can only make their situation worse.
Eurobonds therefore increase the exposure of Member States by the amount of their guarantee ratio: 27% for Germany, 20% for France and 18% for Italy. It is not free money.
Eurobonds are putting the cart before the horse
Debt solidarity looks nice and well. It makes no sense until a true fiscal consolidation is established. Germany is right to refuse to carry the burden of every country's fiscal indiscipline.
They might make sense once Europe is accepting to apply a common budgetary discipline and has similar ratios of indebtedness. We are far from it. Launching Eurobonds that are not backed by fiscal consolidation is useless.
Eurobonds will come too late, and will be too little
Even if Europe dreams of a 100 billion euros Eurobond program, it is unnecessary. The EIB, the ECB, the EFSF are already bonds issued by the European Union. The last thing that is needed is another instrument.
Furthermore, it seems to require a treaty change that will take a year to get approved. So it will have no impact on the immediate challenges.
All this is discussed for a small amount and no certainty of any savings.
Europe's disease: focus on the wrong issues
This debate has become front line. Yesterday, at the China Financial Summit in Beijing, where I was talking about the European debt crisis, questions on Eurobonds were discussed! It was psychedelic to see that China believes that Greece could affect their economy.
The real focus should not be gimmicks. Eurobonds will bring no advantage and certainly, as Chancellor Merkel said, no impact on the much needed recovery.
It's Italy, stupid!
Last but not least it will make the 450 billion euro refinancing of Italy in the next twelve month more difficult. With 1,900 billion of debt, it is Italy that is the danger. And its costs increased dramatically in the last 12 months. It has 120% debt/GDP ratio.
Furthermore, its interest rates increased by 25% since March 2012, making it less likely that it will be able to refinance its debt at the right interest rate.
My biggest worry now is a self-fulfilling prophecy. European leaders have been so public in their disagreements, that investors rightly believe that there might be no pilot on the European plane.
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