BRUSSELS May 21 French President Francois
Hollande and like-minded euro zone leaders are expected to
promote the idea of mutualised European debt at an informal
summit in Brussels this week, increasing pressure on German
Chancellor Angela Merkel to drop her opposition to the proposal.
Senior EU and U.S. officials said Hollande raised the topic
of euro area bonds - bonds jointly underwritten by all euro zone
member states - during G8 talks at the weekend and would again
push it when EU leaders meet in Brussels on May 23.
He is expected to have backing from Italian Prime Minister
Mario Monti, Spanish Prime Minister Mariano Rajoy and the
European Commission, which has long been a backer of euro area
bonds, producing a feasibility study on them late last year
before the initiative was pushed to the background.
The rapid deterioration in the euro zone debt crisis over
the past month, with Greece's potential exit from the 17-country
currency bloc no longer taboo, has brought the idea back to the
forefront, with many economists and policymakers arguing it
would be one of the best ways of restoring market confidence.
"The euro bonds debate is back front and centre and Hollande
will have support from other leaders if he raises it," one EU
"It's not something that's going to happen overnight -
there's a lot that needs to fall into place first - but there is
a desire for a plan of action toward euro bonds."
The summit on Wednesday is scheduled to focus on growth and
investment, with European Council President Herman Van Rompuy
wanting leaders to agree specific steps to stimulate growth and
create jobs across the EU.
Proposals are expected to include boosting the paid-in
capital of the European Investment Bank and plans for 'project
bonds' underwritten by the EU budget to finance infrastructure.
The aim is to agree ideas that can be formally signed off at
the next summit on June 28-29.
But the victory of Hollande's socialist party in France has
not only shifted the euro zone crisis debate more towards
growth, while not abandoning austerity, it has also given
renewed voice to ideas that Merkel has successfully pushed aside
over the past two years, including debt mutualisation.
Merkel has said she is not opposed to jointly
underwritten euro area bonds per se, but believes it can only be
discussed once the conditions are right, including much closer
economic integration and coordination across the euro zone,
including on fiscal matters.
That remains a long way off.
In its paper on what it calls "stability bonds", unveiled in
November, the Commission said it was not an idea that could be
deferred forever, saying the severity of the crisis - which has
only worsened since - meant quicker action needed to be taken.
"While common issuance has typically been regarded as a
longer-term possibility, the more recent debate has focused on
potential near-term benefits as a way to alleviate tension in
the sovereign debt market," the paper said.
"In this context, the introduction of Stability Bonds would
not come at the end of a process of economic and fiscal
convergence, but would come in parallel with further convergence
and foster the establishment and implementation of the necessary
framework for such convergence."
That is language that Monti, an economist and former
European commissioner, has supported in the past and is expected
to second in the discussions on Wednesday.
"Whatever the timeframe was before on moving towards euro
bonds, it's now even shorter because of the worsening in the
crisis," a second EU official said.
"There needs to be a discussion on jobs and growth, but
there also needs to be a discussion on specific steps that can
be taken towards euro bonds.
Several proposals, aside from the Commission's, have already
been circulated for well over a year. One, called a debt
redemption fund, was proposed by a group of German 'wise men'.
That proposal would involve mutualising the debts of euro
zone countries over and above 60 percent of GDP - the debt limit
set out in the EU's stability and growth pact.
Another idea put forward by the Bruegel think tank would
involve mutualising all debt up to 60 percent of GDP, with any
debt over and above that limit having to be underwritten by the
specific country alone.
Economists have argued that the best way of restoring
confidence in bonds issued by euro zone sovereigns is for the
debt to be collectively underwritten by all the countries.
However, that would put a large burden on Germany, the EU's
biggest economy, to finance the debts of other member states.
As well as resolving the region's debt problems, EU leaders
are also expected to discuss how to tackle a deepening banking
crisis, with the banking systems in both Greece and Spain under
One idea is to allow the European Financial Stability
Facility, the euro zone's 700 billion euro rescue fund, to help
recapitalise banks directly, rather than lending to individual
countries that then lend it on to the banks.
But Germany opposes direct lending by the EFSF to banks,
saying it is up to individual member states to ensure the
stability of their banking sectors.