Nicolas Sarkozy and Angela Merkel are meeting in Paris today (consilium.eu)
The European Central Bank last week spent a record €22bn buying euro-zone government bonds in a bid to prevent the eurozone debt crisis spreading, a move that is likely to fuel debate on the creation of eurobonds.
The buying spree represented the most the central bank has spent since it first began bond-buying in May last year in response to the Greek debt crisis.
It also shows the scale of the challenge faced by the bank in keeping down the borrowing costs of Italy and Spain, the eurozone’s third and fourth largest economies.
The bond buyback programme - supposed to be a temporary measure while politicians attempt to solve the eurozone’s problems – is controversial among ECB policy-makers.
It is most strongly opposed by Jens Weidmann and Juergen Stark, German members of the bank’s governing council, who feel the bank is moving into political territory.
However, the bank has felt itself compelled to move as various agreements by EU politicians over recent months have failed to draw a line under the crisis.
A July deal to allow the eurozone rescue fund to buy bonds – which the ECB keenly wants to come into force – has first to be ratified by member states.
The extent of last week’s purchase, revealed by the bank yesterday, came on the eve of a meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Paris today (16 August).
Last week Sarkozy said the meeting would result in “extremely ambitious euro zone governance proposals”.
Eurobonds
The most talked-about issue – though informally – is the mutualisation of eurozone debt through the creation of eurobonds.
Germany has officially said this is a no-go area and will not be discussed during today’s meeting.
"The German government has said on numerous occasions that it does not believe Eurobonds make sense and that's why they will not play any role at tomorrow's meeting," spokesman Steffen Seibert said on Monday.
However, behind the scenes the issue is being increasingly discussed.
An article on Sunday in German daily Die Welt indicated that Berlin was coming around to the idea of eurobonds and cited an anonymous government source as saying that maintaining the eurozone with all its members is an “absolute priority” for Germany.
The idea also has some support from industry.
The head of the German export Group BGA said Eurobonds are needed to avoid a global depression.
"The alternative is the markets attack Italy, then France, we lose our AAA rating and then it's our turn. This is a downward spiral that would lead to a worldwide depression," Anton Boerner told Reuters news agency.
"What have we achieved then?" Boerner said. "We'll end up paying three times over. This way we pay just once."
Leading economists share the same view.
“Unless some framework like European bonds are promoted, it's going to be very difficult for the troubled eurozone countries to be able to meet their financial requirements,” Nobel Prize-winning economist Joseph Stiglitz told the BBC’s Newsnight programme on Monday.
Eurobonds would lower the borrowing costs of struggling eurozone countries but raise the costs of Germany and other countries currently considered a safe bet by markets – something that many politicians in northern better-off eurozone countries balk at.
It would also likely imply further significant EU fiscal integration – currently a topic of heated debate in Germany – the eurozone’s paymaster.
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