German court may silence euro bond debate - for now

Thu Sep 8, 2011 2:27pm EDT

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* Court verdict rules out euro bonds now - legal experts

* Euro bonds could come after treaty change

By Annika Breidthardt

KARLSRUHE, Germany, Sept 8 (Reuters) - A ruling by Germany's top court has made it virtually impossible for Berlin to sign up to joint euro zone bonds now, even if it wanted to, politicians and legal experts said on Thursday.

The Constitutional Court's stance on Wednesday included a provision blocking Germany from pooling debt with its partners -- unless the current European Union treaty is changed.

The court set out its reasoning in a keenly-awaited ruling rejecting lawsuits aimed at stopping German participation in bailouts for the euro zone.

The Bundestag (lower house of parliament) is "forbidden from setting up permanent legal mechanisms resulting in the assumption of liabilities based on the voluntary decisions of other states", reads a passage of the verdict.

Many politicians and economists immediately read this as a reference to euro bonds, and constitutional experts agreed.

"I understand this passage to mean that assuming liability for the debt of other member states, and with that euro bonds in which Germany would have to vouch for another member's debt, is not currently admissible," said Ulrich Haede, professor of law at the European University Viadrina in Frankfurt/Oder.

Policymakers, bankers and economists have been arguing for months about the merits and drawbacks of jointly issued euro zone debt, which could reduce the borrowing costs of weaker member states like Greece and make it harder for markets to speculate against indivdual countries.

But it would also increase the debt costs of countries with more solid credit, such as Germany, and would be risky as the ratings agencies say their classification would reflect the weakest members' ratings and the bonds could even be classed as junk.

MORAL HAZARD

Critics -- the German government and Bundesbank foremost among them -- also say that euro bonds would eliminate the incentive for indebted states like Greece and Portugal to clean up their budgets, creating "moral hazard" and leaving the door open to more debt trouble.

In an attempt to use the Constitutional Court ruling to kill off the debate, German Economy Minister Philipp Roesler told the Bundestag on Thursday that euro bonds were now off the table altogether.

Roesler, addressing himself to the centre-left opposition which favours joint euro bonds, leads the Free Democrats (FDP), the junior partners in Chancellor Angela Merkel's coalition who are among the fiercest opponents to Germany assuming even more liability for its less fiscally-disciplined partners.

"You continue to talk up euro bonds although the Constitutional Court yesterday made it clear that a 'transfer union' such as the one you propose on the left will never be possible, never be allowed," Roesler said.

The German finance ministry, which also rejects euro bonds, responded more cautiously, saying the euro bond issue required more detailed scrutiny of the court verdict.

Asked at a news briefing whether the court ruling negated the European Commission's work in looking into common euro zone bonds, EU Commission spokesman Amadeu Altafaj told reporters: "It might make it more interesting from a journalistic point of view, but it's certainly not rendering work obsolete."

Some analysts maintain that euro bonds or some other form of joint responsibility for debt may eventually prove the only way to end the present crisis.

Eurogroup Chairman Jean-Claude Juncker and Italian Economy Minister Giulio Tremonti have said publicly that euro bonds could be implemented without treaty change.

Others say it would require such changes and analysts say a lot is likely to depend on exactly what form the bonds would take.

Markus Kerber, law professor at the Europolis think tank, said the legality of euro bonds depended on the details, since the court had said it was up to the legislators to gauge when guarantees given to other euro zone states exceeded levels that would be sustainable for the German federal budget.

"Whether euro bonds are admissible depends on the amount of risk or sovereign debt taken on with each bond," said Kerber.

His colleague Haede also observed that the court verdict "does not rule out a treaty change which would create a legal basis for euro bonds".

Members of Merkel's conservative bloc, including Finance Minister Wolfgang Schaeuble, and some in the opposition have argued that the European Union needs to change its underlying treaties in the longer term to achieve closer integration and ensure the stability of the single currency.

The head of the opposition Social Democrats (SPD), Sigmar Gabriel, used the budget debate to call for a treaty change which would make euro bonds possible in future. His party had endorsed the idea of euro bonds ahead of the verdict.

Echoing those calls, one senior EU official said he did not oppose issuing euro bonds in the long run but the pre-conditions would be that every member must have a balanced budget and there would have to be tighter control of fiscal and economic policy.

(Additional reporting by Sarah Marsh and Andreas Rinke, Paul Taylor in Paris, Rex Merrifield in Brussels; editing by Stephen Nisbet)

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