MacroScope

Who expects euro bonds? Look outside the euro zone

It’s already been established that economists’ predictions about the euro zone’s future hinge largely on where their employer is based. Euro zone optimists tend to work for euro zone banks and research houses, and euro zone sceptics for companies based outside the currency union.

It somewhat undermined the idea their analyses are based purely on hard-headed economics, and less on national factors.

There was an echo of that in this week’s of economists and fixed income strategists, who were asked whether they expect euro zone leaders will agree to the issuance of a common euro zone bond, as backed by new French President Francois Hollande.

Only seven out of 18 analysts thought such a bond would come to fruition.

And of those seven? Six hailed from institutions based outside the euro zone, with a German private bank making for the remaining one.

There are several conclusions that can be drawn from this. Firstly, it could be that only economists from non-euro zone organisations think the region’s crisis will escalate enough for Germany to accede to the formation of a fully-fledged debt union.

Shifting euro zone sands

A telling moment. Before pretty much every showdown EU summit since the debt crisis exploded into life, the leaders of France and Germany have got together beforehand to agree a common strategy. It is a truism that the European motor only works efficiently when its two biggest powers are in accord.

This time, following the election of Francois Hollande as French president, there has been no such meeting. Instead he will talk with Spanish premier Mariano Rajoy in Paris before they head to the Brussels summit.
There, Hollande will press for the currency bloc to start issuing joint euro zone bonds and will run into implacable German opposition that will squash the plan for now.
But the plates are shifting and German Chancellor Angela Merkel looks somewhat isolated.

On euro bonds, Hollande can call on the support of Italy’s Mario Monti and the European Commission among others.
Nonetheless, Angela holds the purse strings so while we will see some modest pro-growth measures agreed (and no doubt trumpeted), there will be no pump-priming that requires extra deficit spending, certainly no mutualising of debt and probably no hint that the likes of Greece and Spain will be given longer to make the cuts demanded of them (though that policy’s time could soon come, depending on how the June 17 Greek elections go).

Joint euro bonds: the inconvenient truth

German Chancellor Angela Merkel and French President Nicolas Sarkozy kept a distance from the idea of a common sovereign euro zone bond on this week, with France hinting only that it could be a possibility in the very distant future.

But a Reuters poll shows a growing field of investors and economists say a common bond issuance would be the best — and perhaps the only — way of solving the debt crisis. In theory, it would allow highly indebted euro zone countries to regain access to commercial markets, while providing investors a safeguard through joint liability.

More than that, those analysts think Europe’s leaders may soon have to bow down to market pressures and issue a common bond as soon as 2012 or 2013.