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Tuesday, May 22, 2012 4:21 PM

Germany Rules Out Eurobonds for 104th Time; Damned if They Do, Damned if They Don't

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I have no idea what the actual number of times Germany Has ruled out Eurobonds. It could be 504 or even 1004. I Made up the number 104 which simply means "a lot".

Nonetheless, the Eurobond idea resurfaces every other week or so, and every time, someone from Germany (typically Merkel, the Bundesbank, or the Finance Minister) rules them out.

Once again, this time under pressure from French president François Hollande, Germany rules out common euro bonds.

Germany refused to share the debt burden of stressed eurozone peers on Tuesday, ignoring two of the most influential international economic bodies which offered support for proposals championed by Paris, Rome and Brussels ahead of a summit.

Angela Merkel, Germany’s chancellor, has argued that any co-mingling of eurozone debt would remove incentives for southern economies to adopt structural reforms. The calls from the International Monetary Fund and the Organisation for Economic Co-operation and Development came on the eve of Wednesday’s EU summit.

François Hollande, France’s new president, has strongly backed common eurozone bonds – which would ease funding constraints for the eurozone’s stressed periphery but potentially raise German borrowing costs by diluting its creditworthiness across the currency union.

German officials made clear the idea was a non-starter in Berlin.

“There is no way of introducing them under the current [EU] treaties. Indeed, there is an explicit ban on them,” one senior German official said, adding Berlin would not drop its opposition in the foreseeable future. “That’s a firm conviction which will not change in June.”

Diplomats said the summit, which just last week looked like it would be a highly scripted affair on European growth, had become increasingly unpredictable, with leaders struggling with how to respond to the havoc wreaked by political instability in Greece. Officials emphasised that no formal decisions would be taken.

The euro bonds debate could produce fireworks between Mr Hollande and Ms Merkel – a possibility that has captivated officials involved, given the comparatively harmonious Franco-German relationship in the latter years of Nicolas Sarkozy’s tenure. But most diplomats believe Ms Merkel would succeed in blocking any proposal, producing more smoke than fire.
Damned if They Do, Damned if They Don't;

They say that when Germany and France don’t co-operate, we have a problem,” one senior diplomat from a smaller EU country said. “And when they do, we have a problem, too.

The paragraph from the article sums up the situation nicely. Europe is scrambling madly for a solution acceptable to everyone, but the only solution that works is the one no one wants to hear: a breakup of the eurozone.

Mike "Mish" Shedlock
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