France joins Germany in quashing e-bonds

9th December 2010, Comments 0 comments

France joined Germany on Thursday in rejecting a proposal for eurozone member states to issue joint bonds as a response to the debt crisis that has seen markets push up borrowing rates.

France also rejected calls to increase the amount of the EU's temporary bailout mechanism, saying it was sufficient.

France's rejection of eurozone bonds came a day after the head of the Eurogroup of finance ministers, Luxembourg's Jean-Claude Juncker, attacked Germany for being "un-European" for rejecting the idea out of hand.

"There is no reason today to discuss new proposals so soon after we have just agreed on a permanent (support) mechanism," a French presidential source said on Thursday.

A proposal for eurozone countries to pool their borrowing by creating common bonds "has been the subject of reaction by Germany, it raises difficulties, notably of (its) morality, of sharing the costs and benefits of (bond) issues," the source said, referring to opposition to the idea from Germany.

On Monday, Juncker and Italian Finance Minister Giulio Tremonti had argued the case for eurozone bonds.

The principle of a eurozone bond is that it would enable weak eurozone countries to link up with stronger countries such as Germany and France to borrow money, instead of being exposed alone when they issue their own national bonds to raise cash from investors who demand a higher return from them.

In principle, this would reduce the borrowing rates for the weaker countries but increase them for stronger countries.

A rapid rise of bond rates for the weaker countries was a key factor in driving Greece and Ireland to obtain rescues from the European Union and International FundF, and has put severe pressure on Portugal and Spain.

The French source said: "Today, we have an arrangement which has been accepted by all of the European countries in the Eurogroup, which is the subject of an agreement of support between governments in case of crisis, with a permanent mechanism, which functions under precise rules, an agreement on the involvement of the private sector under rules put into effect by the IMF."

The remarks come ahead of a meeting Friday between French President Nicolas Sarkozy and German Chancellor Angela Merkel and their ministers in Freiburg, western Germany where they will compare notes on the eurozone crisis ahead of a crunch EU summit next week.

The 16 members of the eurozone agreed on November 28 on the creation in 2013 of a permanent system for helping countries in financial difficulties to replace current emergency and temporary support arrangements.

The new system has to be approved by all 27 members of the European Union when they hold an EU summit meeting in Brussels on December 16 and 17.

Analysts have been discussing for months whether and how the European Union should introduce reforms, including institutional elements of mutual support between eurozone members.

They comment that such reforms would mark an important change in the architecture and principles of the EU-eurozone edifice, being a step towards a so-called "transfer union", implying a pooling or even some form of federal control over national economic policymaking and taxation.

France also rejected Thursday calls for increasing the current 750-billion-euro temporary rescue fund.

"Today, the funds are at an amount with permits responding to any possible requests. Therefore, the question of its increase is not actual today," said the French presidential source.

Analysts say the current funds are sufficient to handle a request by Portugal, which is widely seen as the next country at risk, but that it would be hard stretched to rescue Spain, should the eurozone's fourth largest economy be forced to seek help.

© 2010 AFP

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