BOND PLAN COULD END THE EURO CRISIS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

Bond plan could end the euro crisis

By Wolfgang Münchau

Published: December 9 2010 12:43

Jean-Claude Juncker’s and Giulio Tremonti’s common European bond is the first constructive idea since the outbreak of the eurozone financial crisis a year ago. It is the first time that eurozone leaders have dared look beyond the current week’s newspaper headlines. I have no doubt that, if implemented in full, the proposal would end the crisis.


Why should this be? This is not a technical, but a political crisis at heart. It is about whether, when faced with a large financial crisis, the eurozone has the political will to do whatever it takes: set up a mechanism of policy co-ordination, accept fiscal transfers and ultimately move towards a fiscal union. History has told us that monetary unions that refuse to become political unions are destined to fail. The eurozone has reached that point of destiny merely a decade after its launch. It is decision time.


Technically, a bond on its own would not resolve anything. Indeed one could construe pathological scenarios under which imbalances in the eurozone may increase under a common bond.


But the main significance of the proposal is political. A common bond would be regarded as the first step on a road towards a fiscal union. Such a fiscal union need not be large. We are talking about 1, 2 or a maximum of 5 per cent of the European Union’s gross domestic product. Nor need it happen the day after next. Once it does, it would co-ordinate important aspects of tax and budget policies, financial policies, and even employment policies. Its job would be to ensure that the eurozone has a sufficient number of mechanisms at its disposal to deal with crises.


If you accept the Juncker and Tremonti proposal to cap the E-bonds at a level of 40 per cent of national GDP, this would, over time, create a bond market the size of the US Treasury market. It would not only become impossible to speculate against individual member states. The bond would bond them together. The eurozone would also become a global economic superpower in its own right.


Is it going to happen? Angela Merkel, the German chancellor, said no. I am told that Germany’s opposition to the idea is as absolute as can be.


But I have no doubt that, if faced with a theoretical straight choice between a fiscal union or a break-up of the euro, Germany would probably accept the fiscal union. My concern is that the momentum of the crisis may preclude such an outcome. For something as immense as a fiscal union, one needs political and technical preparation. Once the eurozone reaches the moment of truth, it may not be in a position to agree a fiscal union, simply because it may not be physically possible. That is what the bond proposal would do. It would start the process.


Ideally, EU leaders should decide next week to set up a high level working group, perhaps under the chairmanship of Mr Juncker and Mr Tremonti. The goal would be to work out a concrete action plan with a timetable for the eurozone’s future political governance – similar to what the Delors committee did in the 1980s for the monetary union itself.


A fiscal union is both a necessary and a sufficient condition for the long-term survival of the euro. If next week’s summit fails to move in that direction, the eurozone is in danger of running out of time. Smart investors might then start to place serious bets against the system.


Copyright The Financial Times Limited 2010.