By: Dr. Mike Campbell

The engine of economic power within the EU and the Eurozone is the German economy. Germany has been at the heart of provision of funding to bailout peripheral economies which have got into sovereign debt problems since the onset of the global financial crisis – despite what the papers may say, this is neither charity nor altruism. The EU/IMF bailouts require beneficiaries to pay significant levels of interest and agree to a raft of austerity measures and inspections of their economies as conditions of the loan. Furthermore, if the peripheral economies were allowed to collapse, Germany would find itself buried in the rubble, so it has a strong vested interest in being a good neighbour.

As market scrutiny is turned on the debt problems afflicting highly indebted Eurozone nations (Italy and Spain are currently in the spotlight), the yield on their bonds is forced up, making borrowing more expensive and exacerbating their problems. It’s all a question of confidence. An obvious solution to this problem would be to allow Eurozone nations to raise finance by issuing “Eurobonds” which would be backed by the whole block and would therefore offer greater confidence and lower yields than a troubled state could attract. Germany and France, for instance, would still be able to attract investors to their sovereign bonds at a better rate than the yield that a Eurobond would need to offer, but the move ought to defuse the current crisis

Germany is not keen on the idea of Eurobonds. It believes that this option would free the indebted countries from having to tackle their debt problems urgently. Germany favours treaty reform as a mechanism to shore up the Euro and restore confidence – but this would be anything but a quick fix. Actions speak louder than words, and markets need reassurance, so it is plausible that Euro “stability bonds” will come into being despite German reservations.