WILL GERMANY’S CHANCELLOR ANGELA MERKEL AND THE EUROBONDS BE THE ANTIDOTE TO FINANCIAL CONTAGION?
Posted by Barbara Cerda
This entry was posted on Sunday, November 27th, 2011 at 12:05 PM for Surface Earth
An amazing turn of global events is happening in the Euro Zone that is threatening to infect the world. Germany and her first female Chancellor Angela Merkel, is leading the efforts in economic reform in Europe. The only woman currently serving on the G8 second only to Margaret Thatcher is leading the charge that will fundamentally shape the solutions that will prove antidotal to the financial contagion that threatens a global recession. The Bundesrepublik Deutschland has become the voice of reason and substance in a European world of budding chaos and monetary want. Chancellor Angela Merkel has stood her ground and refuses to bend to quick fixes in the face of the decisions needed on how to monetize Greece and eventually Italy; an advent that few predicted a generation ago. Nor will she retreat from her stance on the moral hazards of issuing the Eurobonds with certain liabilities. It is hoped that Eurobonds and Chancellor Merkel may be the antidote to financial contagion that threatens global economies.
The issuance of Eurobonds or blue bonds is receiving split reviews amongst the players in the Euro Zone. The final decision would have the potential of acting as a global stimulus fund. Many have named this debt instrument debuting in 2013 as the “stability bonds”. Its created purpose is to sustain and make balance an economically unstable climate for investors and governments. In consideration of its impact as an instrument of debt, it will be issued in euros as a joint obligation of the 17 participating Euro Zone countries. Its biggest critics’ voice concerns of the absence of credible common governance.
As a progressive concept in monetization its lack of consensus is a result of a need for a central debt office, which is not the domain of the ECB. The primary mandate of the European Central Bank is to maintain price stability or to keep inflation low (2%) within the states of nations. The ECB does not function like our Federal Reserve. Our FOMC governs monetization in a homogenized political and financial culture.
Consensus is split over the concept of joint liabilities, which is divided into three versions within the green paper, detailing its guidelines. Chancellor Merkel struggles to narrow the crucial gap, creating a convergence of ideologies. It will mean a change in treaties or adaptations in how sovereigns may fiscally self-manage.
Diversification of the Euro Zone is more than just its charm, it is their Achilles heel. Chancellor Merkel’s largest fear is that a joint debt with shared responsibilities will only encourage some Euro Zone countries to shirk their obligations in correcting deteriorating governance and fail to institute better fiscal discipline. A case in point would be the recent unsustainable cost of borrowing money for the Italians. Presuming to borrow at such a rate, essentially on preconceived future value as a nation, is inconsistent with the actualities of having the ability to repay. Others in the world have sided with Chancellor Merkel in her unwillingness to quickly embrace Eurobonds. Making this final decision is daunting. In addition there are the private sector investors to consider.
Germany is insisting that the insurance companies, banks and general private sector investors must share in the losses resulting in the Greek bailout. This is a progressive leaning concept that has garnered some outspoken opposition from within the Euro Zone. It was part of the original agreement of the ESM (the European Stabilization Mechanism).
The Eurobonds must contain scale of maturities. The issuance is still unconstructed and the enforcement of conditionality among stakeholders is necessary. Yet perhaps Germany’s Chancellor Merkel’s antidote to the financial contagion will create the needful outcome