Or is the European debt crisis leading to a common European debt market that will challenge U.S. treasuries?
Despite unprecedented action from the European Central Bank, the sovereign debt crisis continues to escalate. Now Portugal is one step away from capitulating to the debt hawks north of the Rhine. Analysts are predicting the demise of the eurozone—but is the crisis merely setting the stage for a dramatic phoenix-like rise of a united economic and political superpower?
The death of the eurozone has become common wisdom. With Greece and Ireland taking bailout money, and with Portugal possibly weeks or days away from being locked out of debt markets, the whole eurozone looks to be on the edge of collapse.
But sometimes common wisdom is just that—common.
What many observers have missed is the planned nature of the current economic crisis.
For years, European leaders have been anticipating an economic crisis such as what we see today—a crisis that would allow them to sweep away national sovereignties and consolidate power “for the greater good.”
The European Commission’s top economists warned politicians back when the euro was created that it might not survive a crisis. Analysts have long envisioned that because it has “no EU treasury or debt union to back it up” and a “one-size-fits-all regime of interest rates,” the day would come that economic crisis would threaten the EU (Telegraph, Oct. 1, 2008).
The fathers of the euro did not dispute this. They knew the European economic union was risky, but they saw it as an acceptable risk—even a desirable one—as a last-ditch option to force the pace of political union. As the Telegraph said, “They welcomed the idea of a ‘beneficial crisis.’” And as “ex-Commission chief Romano Prodi remarked, it would allow Brussels to break taboos and accelerate the move to a full-fledged EU economic government” (ibid.).
“The European experiment with a trans-sovereign currency is facing its first acid test,” wrote Euro Pacific Capital’s John Browne last February. “In essence, the euro was created as a lever to encourage a complete European political union rather than as a currency representing … an already unified economy” (emphasis mine).
According to Browne, a former British member of Parliament, the euro has largely succeeded in creating the will for a federal Europe among the political classes, if not among the masses.
Today, with interest rates soaring in Portugal and with investor attention turning to Spain and Italy, Europe’s founders now have their “beneficial crisis.”
And also the solution.
On December 16, at a European Union summit dinner, European heads of state along with Jean-Claude Juncker, the chairman of the Eurogroup of finance ministers, sprang a surprise on German Chancellor Angela Merkel.
The solution to Europe’s economic crisis is further integration, they said. What Europe needs is a common debt union—an EU treasury market.
According to Juncker, within a month a European Debt Agency could be established with the mandate to issue 50 percent of national debt—even 100 percent for countries experiencing economic stress. The result would be a bond market of sufficient size to be not only the most important bond market in Europe, but one that would be comparable to the U.S. Treasury market, wrote Juncker in the Financial Times (December 5).
“It was one of the first things that was brought up during the dinner and it kicked off quite a strong debate,” said one EU diplomat quoted by Reuters. Merkel was “surprised by the amount of support the idea was getting,” said another.
To this point, Merkel has resisted calls for a common bond market on fears that it would hurt Germany’s credit rating and lead to higher borrowing costs. It would also reduce the incentive for fiscally irresponsible countries to fix their finances.
But to Merkel’s chagrin, the idea of a Eurobond may be gaining steam.
If there were Eurobonds, “I’d buy them right away instead of the bonds of a single country,” argued Italian Prime Minister Silvio Berlusconi. “It’s Europe that’s proving the guarantee.”
Some within the German political establishment even seem to be embracing the idea of a Eurobond. Both former Finance Minister Peer Steinbrueck and former Foreign Minister Frank-Walter Steinmeier oppose Merkel’s stance. “Eurobonds would send the message that Europe is strong and united,” they said.
Olli Rehn, the EU’s economic and monetary affairs commissioner, agrees that a Eurobond might be needed to end the crisis. Speaking at an EU-China trade summit on December 1, he said EU leaders would “do whatever it takes to safeguard the financial stability in Europe.” The debt crisis is a forest fire that needs to be contained, he said.
China seems to like the idea too. At the same conference, Chinese Commerce Minister Chen Deming urged European policymakers to back their tough talk with concrete action to show they can contain the eurozone debt crisis.
China for its part is throwing its economic muscle behind struggling eurozone countries—and buying a lot of goodwill in the process. On Friday, Portugal announced that it would diversify its lender base by selling a batch of bonds directly to a private investor as opposed to holding an auction. Although Portugal’s finance minister would not reveal who was lending the country money, the odds-on favorite is China.
China is already buying Greek bonds, and has announced that it will continue to purchase Spanish issues. China’s $2.5 trillion worth of foreign exchange reserves give it more than enough firepower to completely bail out Greece, Portugal and Spain single-handedly, if it were to sell just a portion of its U.S. treasury holdings.
Yet, more than China’s aid, however much appreciated, will be required to save the euro.
“For a systemic crisis you need a systemic response,” Juncker said. “So I believe that when the day comes, we will come back to [the Eurobond] proposal. I have no doubt at all that we will come back to it.”
EU policymakers can come back to it all they want. The Italians, the Austrians and the Portuguese can come back to it all they want to. But the only way a Eurobond will become reality is if Germany comes around to it.
Germany is the key. And for right now, Merkel, at least, seems opposed to it.
What European leaders must be asking themselves right now is, what can we give Germany to convince it to rescue the union?
The benefits are there for all to see. Even the Germans. Europe would be saved. Germany’s trade partners would remain intact. And Germany would be sure to gain political concessions ensuring it all but de facto control of the new Eurobond market. Plus, the biggest prize of them all: the new revitalized euro—with its common debt union—would finally present a viable alternative to the U.S. dollar for the world’s reserve currency.And who better to run it than the conservative, fiscally responsible Germans?