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16 August 2011

WSJ: Eurobond debate rises in Germany, France - Controversial idea gains attention as crisis efforts fall short


Germany and France are being forced to reconsider an unpalatable idea as the eurozone's debt crisis spreads to its core economies: making the currency bloc as a whole responsible for its member nations' debts.

Ahead of a summit on Tuesday between German Chancellor, Angela Merkel, and French President, Nicolas Sarkozy, Berlin and Paris publicly dismissed the growing clamour for common eurozone bonds. But the realisation is dawning in both countries that Europe may need radical change to save its common currency.

On Sunday, one of Germany's leading newspapers, Die Welt—whose centre-right leanings put it close to the government's thinking—devoted its front page to explaining why eurobonds are a potential last-ditch measure to prevent the eurozone from collapsing. German media have seized on the issue, forcing politicians of all stripes to declare a position.

A spokeswoman for Mr Sarkozy said eurobonds are "not on the agenda" for Tuesday's meeting with Ms Merkel. The summit is instead expected to focus on piecemeal improvement of the coordination of euro members' economic policies, German and French officials said.

The left-leaning opposition in both Germany and France broadly supports eurobonds. And the escalating crisis has repeatedly forced Ms Merkel to cross previously announced red lines in order to save the European project. Breaking up the euro would be ruinously expensive for Germany, Berlin officials say, as the resulting exchange-rate swings within Europe would ravage Germany's exports and banking sector.

A fiscal union would mean building some central authority over national tax and spending policies, increasing subsidies from richer countries to poorer ones, and borrowing collectively from bond markets. Economists say a united eurozone would be a solid borrower. Its fiscal deficit is on course to be around 4.4 per cent of gross domestic product this year, and its total government debts at about 87 per cent of GDP, according to the International Monetary Fund. Such a far-reaching revamp isn't on the cards yet, and would require tortuous political negotiations and changes to European Union treaties.

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© Wall Street Journal


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