A lively debate on euro debt instruments

Stick with me.  It sounds boring, but I at least found it interesting.
 
Yesterday we had a fascinating debate in our ECR Group meeting about a proposal currently going through the parliament — we vote in Straz next week.  It covers a range of issues relating to economic management in the EU, and my good colleague Kay Swinburne MEP (who has forgotten more about the financial services industry than I ever knew) says that much of it is unexceptionable.  In case you need to know, we’re talking about Sylvie Goulard’s report “Proposal for a Resolution of the European parliament and European Council on the Effective Enforcement of Budgetary Surveillance in the Euro Area”.
 
But it includes a proposal to create common eurozone debt instruments.  Strictly speaking these are not “Eurobonds”, since this phrase already means something else.  But we need an easy handle for the new instruments, so I’m afraid they’re being referred to as Eurobonds already.  So I’ll use the term, but please understand that it means pooled debt backed by the whole eurozone (as distinct from the lending instruments of individual eurozone states, which are normally denominated in euros but backed only by the state concerned).
 
The creation of these Eurobonds is intended to assuage the euro-zone crisis, by spreading the risk of dodgy peripheral countries (the “PIGS”) over the whole zone.
 
There is a straightforward (and simplistic) case for British MEPs to support the measure, and it goes like this: While we don’t want to adopt the euro, we wish our EU partners well with the project, and we recognise that the UK economy would suffer from any dramatic collapse in the currency of our major trading partner.  Therefore in a spirit of fraternal solidarity we should  vote YES, to support our partners in their bold initiative to save the euro.  OK, you’ve spotted the fallacy, but let’s spell it out.
 
Spreading the contagion: These Euro-bonds will result in an averaging of risk, and interest rates, over the whole zone.  So Portugal will be able to borrow more easily and cheaply.  But the core countries will pay more for their debt, and be regarded by the markets as less secure than they were.  Ambrose Evans Pritchard in the Telegraph suggested that France could be down-graded from AAA to AA, for example.
 
German public opinion: German voters are deeply opposed to taking more pain to bail out the profligate periphery.  The German Constitutional Court is likely to rule on the legality of cross-border debt — I’m attending an Open Europe seminar in Brussels on this very subject later this morning.
 
Creating moral hazard:  The PIGS have only been goaded into serious fiscal retrenchment because they’re standing on the edge of a cliff.  Make it easier for them to borrow, and Greece will be back in its bad old ways.  We’ll simply be putting off the evil day when they face up to reality.
 
Building EU hegemony:  This is another major step in building a financial infrastructure for a European State.  It will be accompanied by all sorts of regulatory and other measures designed to achieve fiscal coordination, and it sits alongside plans for EU taxes and so on.  We are fooling ourselves if we imagine that Britain would be unaffected by these measures, even if we’re not in the eurozone.  It will be a further ramping-up of the constant pressure to get deeper into the federal project.
 
There is an argument that says we should oppose the measure in a spirit of fraternal solidarity, because it is bad for the euro-zone; it damages our partners; it puts off vital and painful decisions; and it defers the necessity (in my view) to start on an orderly debt restructuring for the PIGS. We should be cruel to be kind.
 
I was delighted to find that the group overwhelmingly took the view that we should vote against.  Special credit is due to our Polish and Czech colleagues.  Those countries could well “benefit” at some point from the lower interest rates within an EU debt union, yet they were quite clear on the principle, and firmly opposed to this new federalising measure.

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