WSJ: German bond sale spurs worries

A German government debt auction drew some of the weakest demand since the introduction of the euro, signalling diminishing investor appetite for even the safest eurozone assets amid Europe's worsening debt crisis.  

 

Under the new rules, the Commission will have greater surveillance powers so that the situation does not arise again whereby failings in one country endanger the stability of the euro area as a whole.   

 

A Brussels proposal for a joint “eurobond” to steady sovereign debt markets has drawn a frosty reception from some of the most creditworthy eurozone states, with Germany attacking the idea as “troubling” and possibly counterproductive.  

 

Europe's top insurance regulator has called for a re-think over whether the industry should consider government bonds as risk-free in the light of the eurozone debt crisis.  

 

 

European Council/Parliament Statements (crisis)  

 

S&D: Focus on investment to avoid a spiralling debt crisis

S&D Euro MPs today urged commissioners Olli Rehn and Algirdas Semeta to stand firm in defence of investment to boost growth and job creation. During a European Parliament hearing, they also called for the early introduction of eurobonds.  

 

 

Economic Governance Developments  

 

WSJ: Pressure on Merkel amplifies

German Chancellor Angela Merkel faces growing calls to soften her resistance to a potentially powerful weapon in Europe's debt crisis: eurozone bonds that would raise appeal for investors but make each euro member liable for the debts of the others in the currency club.  

 

German Chancellor Angela Merkel rejected criticism of the ECB for not taking bolder steps to stem the eurozone debt crisis and made clear the next tranche of aid for Greece could not be paid out unless big parties in the country committed in writing to back austerity.  

 

These are the most difficult times for banking in central and eastern Europe (CEE) since the immediate aftermath of the end of communism. With the eurozone in crisis, many lenders are pulling in their horns even more drastically than they did when the global turmoil first struck in 2008-09.  

 

In his speech for the Presidential Lecture at the Centre for Financial Studies in Frankfurt, FSA Chairman, Adair Turner, focused on the debt in the economy, arguing for a radical policy reform.   

 

Cameron said that as economic growth stalled, it was "essential" that the UK and Germany should work together, and the German view that eurozone countries must show a commitment to fiscal discipline was "absolutely right".  

 

 

EFSF/ESM/Eurobonds  

 

European Commission Green Paper on the feasibility of introducing stability bonds

This assesses the feasibility of common issuance of sovereign bonds among the Member States of the eurozone. The introduction of commonly-issued stability bonds would mean a pooling of sovereign issuance among the Member States and sharing of associated revenue flows and debt-servicing costs.  

 

Euro MP Sharon Bowles, Chair of the European Parliament's Economic and Monetary Affairs Committee, welcomes proposals on eurobonds which will be presented to her committee by European Commissioner Olli Rehn later today, but notes they will not solve the crisis in the short-term.   

 

The introduction of a joint "eurobond" that would replace national issuance by individual members of the eurozone could offer the best solution for policymakers seeking a more stable sovereign debt market, according to a study by the European Commission.  

 

 

At-Risk States  

 

 
EurActiv: Brussels confident Italy's Monti will balance budget

After talks with the new Italian Prime Minister, Mario Monti, Commission President, José Manuel Barroso, said he was confident that Italy would deliver the needed structural reforms to balance the budget.  

 

Hungarian Prime Minister, Viktor Orbán, requested 'precautionary aid' from the EU and the International Monetary Fund, saying Hungary was seeking "a kind of insurance policy" against possible future financing difficulties.  

 

Van Rompuy and Monti discussed the current economic and financial situation in Italy.   

 

Ms Lagarde said that the IMF has received a request from the Hungarian authorities for possible financial assistance.  

 

Prime Minister Papademos reiterated the full determination of his government, supported by all political parties, to implement the programme agreed upon with the Troika.  

 

The debate about how big the losses that holders of Greek bonds should suffer is about to bubble up to the surface again. Banks and insurers are on the verge of forming a steering committee to represent creditors in talks with Greece.  

 

 

Commentataries on the Economic Crisis  

 

Mody/Sandri: The interplay of sovereign spreads and banks' fragility in the eurozone

This column argues that the payoffs from strengthening banks' balance sheets can still be large and, therefore, fiscal support is merited. But a more resolute strategy for winding down banks is also needed.  

 

Writing for the FT, Schepers, vice president and chief financial officer of the European Bank for Reconstruction and Development, says that Europe's leaders should seize this opportunity to put in place a permanent structure for eurozone governance.  

 

This column argues governments and banking supervisors should agree a recapitalisation package well before Christmas. It adds that the required amount to be raised by each bank should be presented as a euro amount and not as a ratio so as not to tempt banks to cut down assets instead of raising capital.  

 

In his WSJ column, Nixon writes that after almost two years in which the focal point of the eurozone debt crisis has shifted from one European capital to another, it has finally arrived where it belongs: in the bloc's headquarters in Brussels.  

 

The European Union is in urgent need of repair. Its structures are incapable of dealing with the huge political and economic issues we are facing today. It lacks the legitimacy it needs to operate efficiently and effectively. The answer is to replace the existing EU with a new, two-layered structure.   

 

Patterson's latest book ends with two recommendations for the future which both Eurosceptics and federalists alike may find controversial. It offers UK businesses and individual taxpayers a comprehensible explanation as to how the money they pay to Europe is raised and spent on their behalf.  

 

David Marsh is of the opinion that the answer is not 'more Europe' – as German Chancellor Angela Merkel keeps saying – but, instead, 'more euro'.  

 

In his FT column, Münchau says we have gone way beyond the point at which this crisis is solvable by standard instruments of economic policy. The survival of the euro will now depend on whether Ms Merkel or Mr Draghi, or both, will blink. This may yet happen, but not right away.  

 

Germany's foreign minister writes in the FT that an erosion of the eurozone would jeopardise Europe as a political project, and with it the chance to make our values and interests be heard in the new power set-up of the 21st century.  

 

 

Think Tank Contributions  

 

Bruegel: What kind of fiscal union?

This Policy Brief proposes that the EMU architecture must be strengthened by taking steps towards a fiscal union that involves both a political authority (a euro area 'finance minister') and fiscal resources to prevent, manage and resolve crises.  

 

In this new ECRI Commentary, Angelo Fiorante writes that foreign currency indebtedness in new EU Member States has had serious post-crisis consequences, where a substantial currency mismatch has contributed to an alteration in the macro-economic and financial risk profile of individual countries.   

 

Philip Whyte writes that weary European policy-makers would do better to reflect on why the eurozone faces an existential crisis while the US does not. The answer is that the two are very different monetary unions.  

 

Benedicta Marzinotto comments that there is one aspect of the eurozone that was little understood when the project was launched and embraced by the Member States: countries in a monetary union issue debt in a currency that is foreign to them.   

 

This study presents the key findings of the conference, 'Monetary Policy after the Crisis', jointly organised by SUERF and the National Bank of Poland in Warsaw on 4 March 2011.  

 

In this analytical policy brief, CEPS Director Daniel Gros explores whether there is a fundamental difference between a formal sovereign default with a haircut and debt monetisation, which reduces the purchasing power for investors by the same amount.