Luxembourg's prime minister Jean-Claude Juncker and Italy's finance minister Giulio Tremonti have suggested the eurozone’s woes could be solved by the issue of a consolidated European sovereign bond. Unsurprisingly, Germany’s chancellor Angela Merkel has said “not likely”.
Whether a consolidated European sovereign bond is a good idea or not, one question comes to mind — why don’t politicians think before they speak?
Last Thursday, European Central Bank President Jean-Claude Trichet said the ECB had very deep pockets and was prepared to spend money on government bonds. His comments turned the market around, peripherals tightened and everyone was feeling more positive.
Then, on Monday, Juncker and Tremonti thought it was a good idea to table the idea that Europe needs E-bonds — and we are back to where we were last week.
Had the gentlemen in question asked the advice of anyone who knew anything about markets, they would have been told to discuss the matter in private. It ought to have been obvious that public discussion would cause the same kind of turmoil created when Germany and France brought forward the idea of bondholder bail-ins.
It was inevitable that Germany would say no to the idea of a common European bond, that this would show there was complete disagreement at the top of the European Union on how to move forward and that, once again, peripheral markets would be under siege.
Technically, a common European bond could work and it would solve a lot of problems for the countries struggling to borrow. But there would need to be some very strict discipline and budgetary control at the heart of Europe. Otherwise the moral hazard would be enormous, with the weaker countries being able to arbitrage off the credit ratings of stronger nations.
In other words, if Europe goes down the route of the E-bond, it would effectively mean that countries like Germany, Holland and France would bear the brunt of funding everyone else.
Germany cannot be blamed for disagreeing with the idea. The country is able to borrow at a very low rate, it has been conservative in its fiscal policy and it has a good reputation in financial markets. It is unlikely to agree to bail out a country that has behaved less well without some control over that country's future fiscal behaviour.
What Germany wants above all is fiscal discipline and accountability from its fellow member states and it would require all the peripheral sovereigns to give up their autonomy for this to be achieved.
Then, and only then, could Germany countenance the idea of acting as supporter of the whole system. That's not an unreasonable position: after all, when you finally agree to go into rehab, you generally have to leave your bottle at the door.