German Chancellor Angela Merkel has said changes to the EU treaty, rather than eurobonds, will help solve the raging debt crisis in the eurozone.
She said that what Europe needs is a political response, rather than the economic response of bonds backed by all 17 eurozone states, dubbed “eurobonds.”
Analysts say Merkel is trying to steer away from bonds that are backed by all eurozone states because Germany is likely to bear much of the cost of jointly backed bonds.
Despite the opposition of Europe’s largest economy, the eurobond plans are gaining increasing support.
On Tuesday, Lucas Papademos, the new Greek Prime Minister, said that eurbonds “could provide the means to overcome the crisis.”
Merkel has argued the opposite: that the debate on the jointly backed bonds should happen at the end, rather than in the middle of the crisis.
She said that treaty changes are the most important change to solving the crisis and he top priority right now. Should the changes be too difficult on a full-scale EU level, they will be tried with just the 17 members of the eurozone.
She said that the crisis is a “politically derived confidence crisis” and needs legislative and diplomatic prowess to solve it.
Though the full details have not been disclosed, a draft document has been leaked to news media that shows three important proposals in the introduction of the new, 17-country-backed eurobond.
The first option would require an extensive overhaul of each eurozone country’s bonds market, as the new scheme would completely replace national bonds. This would mean each eurozone government must guarantee the debt of all other countries.
A less strict option that was mentioned would be to see national bonds partially replaced with eurobonds. There would be a limit that would closely relate to how well a country followed EU regulations.
The final option was to replace some national bond issues with eurobonds, with a limit on guarantees.
Oli Rehn, European Economic and Monetary Affairs Commissioner, said that these bonds would have to be implemented with very strict rules, despite protests from German policymakers. He said that eurobonds would need to be accompanied by “substantially reinforced fiscal surveillance and policy co-ordination, as an essential counterpart.”
However, German Finance Minister Wolfgang Schaeuble said that this would take the pressure off of struggling eurozone countries to tackle their own debts. He said that eurobonds “take away the pressure on these countries,” a sentiment that most of Germany agrees with.