Blanchard: Fiscal Compact a gateway to eurobonds

Olivier Blanchard is quoted in the press today:

“When there was no fiscal treaty nor budgetary and budgetary discipline instruments, the Germans had good reason to reject bearing the brunt of irresponsible policies by other states,” Olivier Blanchard told the Monday edition of Financial Times Deutschland.

“But now we have a fiscal treaty. The Germans should accept that the eurozone is going by way of eurobonds,” he added.

39 replies on “Blanchard: Fiscal Compact a gateway to eurobonds”

I am not clear on how these work. Is this right?
An entity uses them to borrow money at x% and the lends that money to the periphery at a margin.
The x% is determined by the markets and could rise so that the final borrowing cost for the periphery could be v high too.
Financially tenable but socially and politically difficult especially when the end borrower is fundamentally unable to pay

From Germany’s point of view, not alone is the fiscal treaty not a gateway to Eurobonds – it is the opposite of Eurobonds, as it is seen as a solution that will obviate the need for Eurobonds. Germany wants to move back to Maastricht, where pooling of debt is prohibited, and does not want to move forward to federalism. All official German statements on this have been 100% consistent and very clear. For example this one when the fiscal union was first promoted:

Meanwhile, Finance Minister Wolfgang Schäuble reiterated his firm rejection of eurobonds. Speaking to the Passauer Neue Presse, he insisted that pooling bonds was something that the European treaties excluded. “There can be no eurobonds. The German economy would be overburdened if we had to guarantee the debts of other states.”

Instead Schäuble wants to see the rules of the Stability and Growth Pact enforced. In particular debts must not be allowed to rise above 60 percent of gross domestic product, he said.

In a key speech to the German parliament on Friday on the euro crisis, Merkel spoke out against eurobonds, saying: “Whoever has not understood that they cannot be the solution to the crisis has not understood the nature of the crisis.”

She also ruled out using the ECB as lender of last resort. Instead she said Germany would push for a “fiscal union” which could impose tough budgetary disciple on the eurozone states.

All that Blanchard is demonstrating is his political naivety. There is a signed fiscal treaty that has yet to be ratified. Admittedly, it contains for the most part commitments which are already part of the legislative armoury of the EU as a whole. But this was also true of the original Stability and Growth Pact. Before Germany could contemplate the introduction of eurobonds, it would have to have confirmation on the ground that countries in the EA were living up to their commitments. With the Dutch government about to fall because of its inability to do so, Blanchard’s comments seem even more out of touch.

cf. also relevant commentary by Wolfgang Munchau on the idea of an EU-wide bank resolution scheme.

Countries that joined the euro are stuck with it and the only way to make it work is to follow the painful path of structural reform, reducing current living standards and building up reserves to deal with future shocks.

There is lot of things the Germans should do. Whether they have the political will or not is quite another question. All of it depends on the electoral strategy of the current right of centre government. Presently it is totally off the table. There is no way Merkel will go into the 2013 election supporting such a proposal.

I have been to Germany a few times over the past few months and it is clear that their emerging right wing press are totally opposed to a common eurobond. Most Germans feel totally uncomfortable with the fact that the future of Europe depends on them (understandably). But simultaneously they know that thye benefit hugely from the Euro, and don’t want to give this up. They are just hoping that the Greek, Portugese and Spanish leave at their own will.

If Hollande gets elected he might call for something along these lines. Merkel might use this as political cover to support something along those lines. But it will be much closer to the Brugel proposal on red/blue bonds:

Germany? Eurobonds?

Rearrange the following words into a well known phrase or saying: my over body dead (said Wolfgang).

Everything is loaded in Germany’s favour in the current system(s) – which is why the only thing they are doing is trying to find a way to make the current situation continue to ‘work’.

But the forces of darkness (if you’re German) are rising up against them. The French moving to the left. The Dutch moving to the right (and rapidly by the looks of it). Periphery country banks not buying their own sovereign debts up fast enough as German banks are not unloading them fast enough. A race against time.

I’d like this in writing before May 31st; and the odds are a million to one.

I support Eurobonds, but it would certainly assist if the Fiscal Compact had some social scientific economic validity, which, unfortunately, it doesn’t. Ergo, why place dangerous NonSense into the Irish Constitution?

To use the recent vernacular, why buy a Pig in a Poke?

Why hold the fair day ridiculously early? The Portugese have passed it but in will not go in their constitution; it is still being debated in the Bundestag, with the SPD holding out for growth measures and will not reach a vote before end of June at earliest; we are not even giving President to be Hollande any time to take on his promises on growth and the arbitrary, and non-scientific debt brake; the Dutch are having a few problems with their far right and budgets at the mo; the Spanish will never recover if they pass it; the Italians are well, Italians and will muddle through somehow; Greeks are on life support or suicidal or dead; and capital continues to flow from elsewhere to Germany; and the BundesBank, with Herr Weidman at the ideological nationalistic wheel, is still running the show at the ECB …….. what the hell are we doing?

The Gov has resorted to the politics of fear – how sad to see a bright guy like Varadkar reduced to such lunacy.

I’m taking a vacation; Seven_of_9 is taking me off the planet to a Spa on Panopticon729 which was liberated by the Romulans from the Borg a few thousand years ago. I might also study a little of their history, as the Panopticon is taking over around here. Blind Biddy is staying put and fighting for a NO VOTE to all this insanity.

You do really have to wonder.

“… …socially and politically difficult especially when the end borrower is fundamentally unable to pay.”

I have some difficulty understanding how a ‘prudent’ lender – who has ‘whose’ interest at heart? – would actually lend money to an income constrained borrower (or even an insolvent one). Now why would they do that?

Ah! I get it!. The lender knows that they will not recover their capital (its not real anyway, its virtual), but they will get a juicy cash flow. Skim the percentage is the new paradigm. You borrow at 1% or less, leverage up your credit, and lend out at 5%: your a right winner, all right.

But, …. terms and conditions will apply. Legislators do have to stand for election from time-to-time. France is not exactly a good example, but it may be close. I’d keep an eye on the US for a better example. Netherlands? Greece? Spain is looking more-and-more like ‘sweaty-gelly’. Fun and games in prospect. And after The Games – its the UK’s turn.

This pure wishful thinking and meaningless and further feeds into the myth that this is a fiscal crisis.

The problems in the Eurozone (outside Greece) were caused by two things:
– real/nominal exchange rate mismatches leading to current account imbalances
– capital flows from the core to the periphery leading to property bubbles in Spain and Ireland and a subsequent banking system collapse.

A Eurobond in itself will not necessarily fix these problems or prevent them from reappearing. Sure, it will paper over the cracks and allow insolvent states to borrow at lower costs, but can you imagine how many pounds of flesh the Germans will require before they agree to it? Do we seriously believe that the sovereign power to set our own tax rates will survive the introduction of a Eurobond?

As I’ve argued before, the only way we can prevent these crises from happening again is by
– moving to a Euro-wide banking system
– redefining the role to ECB
– putting in place rules on current account, capital and fiscal imbalances (but all together and not only the latter, as in the current treaty).

Muchau has an interesting take on Euro-wide banking:

I agree completely with the last paragraph – the only way anything is going to get done is if the future of the Euro is threatened.

MORE DEBT !! you want more debt.

The Germans should accept they have sovereignty over Germany & Ireland should accept they have sovereignty over Ireland.
Problem solved as even Germany must borrow from itself to sustain a viable & semi rational economy.

Didn’t Francois Hollande declare that he would repudiate the FC if elected? Admittedly, politicians rarely stay the course on election promises.

Spanish yields are back up. The probability that Spain will join the bailout club followed by Italy must call into doubt the practicality of the FC at this volatile period.

I would agree with Merkel on this one: “German Chancellor Angela Merkel has adopted a hard line against eurobonds, arguing that Germany — Europe’s largest economy and the state with the lowest borrowing costs — would pick up the tab if eurozone debt were pooled”

Why would Germany agree to pouring its money into the peripheral’s hole in the bucket fed by austerity and deflation, its pouring good money after bad. Plus the danger is that money will only be used to prop up failing regimes as the one in Ireland.

Here, incompetence is so endemic that though we have a trail from Marie Mackle, which hopefully she will get to read the the Public Accounts Committee, of named senior officials in DoF who singularly and collectively isolated, suppressed and denied her strong information of problems in the property market, while those who repressed such information, are still in situ.

Neither have we had an adequate exposure and examination on a case by case basis of lending patterns at the highest levels in the banking system.

Why such Germany prop up the old elite in countries such as Ireland readymade to lay waste as they’ve done before in spite of a large part of responsibility for the mess. In Ireland your chances of going to jail fall in proportion to how much you’ve contributed to the financial wrecking of an economy; they rise compared to the failure to pay a television license.

Plus the asset/liability divide between the core and the periphery is a faultline in the euro not addressed by eurobonds. On a bell shaped curve the euro gives the illusion it works, but only for a time as the graph rises; it falls thereafter.

German banks have profited from lending to the peripherals. Its not in the business of becoming liable for the debts incurred by the periphery under this arrangement; though annexation of these failed states must be an option currently under consideration by some of the more imaginative and ambitious members of the Bundestag attracted to ‘federalism’.

@ Aidan R

“But simultaneously they know that thye benefit hugely from the Euro, and don’t want to give this up. They are just hoping that the Greek, Portugese and Spanish leave at their own will. ”

That is contradictory. If the peripherals (including Holland! ) leave, the Euro will shoot up in value like the poor Swiss Franc did. And the Germans can’t want that.

The alternative to *Merkosy* starts with France general elections in which Sarkosy finally becomes part of historical dustbin of EU politicians – followed in 2013 by Merkel in Germany.

Holland is (also) forcing its own political destiny with next Sept/Oct general elections….ie. reinforcing growth intead of austerity!

Will that happen and will it change the course of current discourse on macro policy inside Ecofin and Bafin(Germany), I think very likely> direction of eurobonds and its (political) feasibility in Council.

SPD (Germany) advocates it – will get a major political lift with Sarkosy’s defeat – ending the pre-eminence of Council over Community approach to decision-making inside EU.

Remember, EU, since its Rome construct, is a Political Project. It ain’t fundamentally an economic -policy oriented project. That’s the reason why so-called pundits (Munchau) and academics have great difficulty reading the Berlamont tea leaves, as developments inside Brussels Chambers move forward step-by-step through a mirage of (policy) contradictions.

The ultimate goal is ever-closer-union. The means are principally political gamesmanship…in which economic plays a marginal factor analysis.

Eurobonds will not arrive like manna from the heavens. Their appearance will require more than prayer.

@ David O’Donnell

Eric Le Boucher says in a commentary in the French daily Les Echos: German philosopher Peter Sloterdijk has remarked that France is the only country where political movements never engage in an examination of conscience. The left papers over all of its faults with references to the Revolution which it considers to be the only Truth.

The right, which used to congratulate itself for engineering the Restoration, subsequently seized on De Gaulle as a means to blot out 1940 and France’s collaboration. The past is mythologised and when we examine it for help in facing the ordeals of our own era, it is glorious but of no practical utility. All it can offer, as Mélenchon would say is a chance “to dream”.

But that is precisely the problem, we have had enough myths! Jean-Luc Mélenchon along with Nicolas Dupont-Aignan and Marine Le Pen are vaunting the merits of protectionism, an exit from the euro, and inflation. But none of these politicians can cite a country where these ideas have succeeded. Do their supporters not have eyes to see the extreme discomfort of Hugo Chavez in oil-rich Venezuela, and compare it with the success of reforms adopted by Lula da Silva in Brazil? Or the deadlock and inflation that have resulted from the populist strategy of default in Argentina?

Eurobonds is further commercial bank credit creation…….this has been tested to destruction withen the eurozone as all capital is run down to pay interest.
Eurobonds would involve the further centralisation of the banks power in Europe.
The link between individual Exchequers and CBs appears to be broken in Europe , (with at least the Exchequers not doing their duty and thus committing treason in the process.)
Goverments will still have no power to issue…….their only power will be as rent /tax collectors for banks interest operations.

We have entered a debt deflation stage…this might be postponed for a small time by a larger collective European debt but the interest is always a exponential function.
Bankers are now using this debt deflation excuse to seize the commons utilties.
This is a all out war by bankers & their servants in each jurisdictions withen the Russian doll system of the post war European construct.

Compound interest is such a simple mathematical concept………why have most economists looked the other way ?

“To use the recent vernacular, why buy a Pig in a Poke?”
because its a pig. or some sort of edible animal. Maybe a red herring or a bunch of bull. The alternative is to stalk off from the market with nothing, and hear the town gates slam behind you. And your hungry.

Wishfull thinking from Olivier Blanchard. It might happen, it would certainly make the IMF’s job much easier, would enable a new round of ‘stimulus’ and profit taking in European banks and very quickly bankrupt Germany.

Were being told the Fiscal Compact is nothing to worry about, the Germans are being told its going to turn the junkies into misers….

Like the old Dire Straits sone… Two men say they’re Jesus, one of them must be wrong…

Yesterday’s solution to today’s problem. With the core under pressure now what benefit Eurobonds? European electorates are voting for divergence rather than convergence so could Eurobonds really be credible at this stage in the game?


When has any stage of this game been ‘credible’? Hence the nationalistic divergence, quite a bit of it of the far right fascist variety and back to the late 1920s and 1930s … who is making the headlines in France, The Netherlands, and Finland?

ECB could print €3 trillion Euro now. Then a get in or get out OK. The system was flawed and not regulated.

Fiscal is part, but only a part, of what is essentially a Financial System Kon of the Highest Order.

@Michael Hennigan

No shortage of ‘illusions’ around here either. Methinks the state was built on one. I was hoping for something a little more substantial this century …

btw Sloterdijk is surely Dutch? I’ll stay with Habermas … not all in Frankfurt are dictatorial , which the Frankfurt School learned from the 1930s, and the French have yet to address that era – the other Long Fellow still casts a long shadow, notwithstanding the fact that he did feck all real fightin and he had to wait for the Marines to make la difference!

I find the choice of words revealing.

From the Irish Fiscal Compact sales force we have had both Gateway and Pathway.

What are recipients of this wisdom likely to assume at least subliminally from those?

Put “gateway” into Word Thesaurus and you get the common understandins:


“Pathway” gives you:


Not one of them summons up an image of Mr Ireland stood the wrong side of a turnstile with no ticket, lots of police officers and a smug looking guy in the kiosk on men’s singles final day at Wimbledon.

“*-way” is either a trifle naive, or spin. You decide.

Germany certainly needs to be clearer about the stronger ‘political union’ to be entered after the fiscal compact passes, mentioned by Merkel at the end of last year.
With a new socialist leader in France opposed to the fiscal compact, Germany should start talking Eurobonds and fiscal transfers and other growth measures for the peripheries.


The bank resoultion mechanism is much needed and long overdue. Munchau outlines well the obstacles, its positive to hear more experts are talking about it.

Depressingly we are still analysing the solutions to the problems of 2008… Eurozone-wide bank resolution is so long overdue it is heading towards being forgiven. I expect Occupy the 99% to be camped out in favour of this.

What is even worse is that countries are swallowing whole the idea that banks are more important than sovereigns…


If you replaced the Bowden cable in your car that links the accelerator pedal to the throttle with a freshly caught eel, you would find controlling the fuel supply to the engine rather unpredictable. However, if you had no imagination, and could not envisage anything but an eel performing this function, then you would probably spend a lot of time and energy pandering to the whims and foibles of the eel. You wouldn’t want to freak it out.

Generally engineers are brighter, and more logical than economists. Roll on the Bowden cable of money supply.

@ Philip, thanks for the link, the recommendations of the paper are sensible and not many people would argue with them.
The commission is expected to present its framework at the G20 in June and finalise it by 2013. Here is some comment on that by Fitch – they reckon it will several years to be adopted as law by various states and they feel that taxpayers will be contining their support of the banking sector for a while. It would be preferential if these things could happen more quickly, its a step in the right direction.


Like Chris, I too think the recommendations in the report on Euro-wide banking are sensible and to commended.

I notice that you recommend a non-zero risk weight for sovereign debt. This seems to tie in with the recommendation of Chile’s former finance minister, in the talk highlighted by KO’R recently, whereby he said that we should be encouraging banks to get sovereign debt off their books.

However, this policy direction seems to be in conflict with the ECB’s use of the banks as an indirect conduit for propping up the sovereign bond market. IMO, this issue is crucial for the future of the Eurozone and the best policy direction is far from clear.

I notice too, that in you post above, you use the definate article in “The detailed design of a European-level banking system”.

Maybe I am reading too much into this, but this gives the impression that this is an official European policy document that will at some stage be taken down off the shelf and put into practice. You, yourself, have also given this impression when talking in public about a “sequencing” of reforms.

However, as Muchau’s article today highlights, there is little cause to optimistic that such reforms will ever see the light of day, particularily given the prevailing Germanic narrative of the crisis and its resolution.


Before the fiction of zero risk sovereign bonds was introduced it worked kind of like this:

‘Risk’ would be channelled into a softer currency – via printing/monetary financing, or even just the anticipation of that by the fx market.

That would lead to higher inflation expectations in the ‘risky’ country.

That would lead to higher bond yields to reflect not actual default risk, but to compensate for likely inflation.

The likely paths of inflation and fx were very difficult to predict but when you considered a bond yield, you would attempt to forecast them.

Underlying all this was the ‘real yield’ that you chose to work backwards from. Real yields could be studied historically on, and could be observed to vary quite a lot over the decades.

Bond analysis was tricky, interesting and the uncertainties were almost impossible to miss.

Eurozone and other ‘great moderation’ ‘convergence’ and the belief that inflation could and should be banished was a dumbed-down and deluded interlude. There is a blueprint available from the reasonably recent past that seemed to work.

@ grumpy

With the usual qualification that I have no technical expertise in this area, it seems to me that the problem is no longer that of the markets pricing sovereign risk accurately but, if anything, being too exigent in the exercise (as the market turmoil this morning underlines).

The problem is one of a breakdown in confidence and a paucity of “safe assets”. The ESBies paper from last year did the best job of explaining the phenomenon as far as I am concerned.

I would differ with trend of economic commentary not in terms of the accuracy of the analysis but because of the unrealistic proposals – politically speaking – that often accompany it.

By way of example, there is no way that a climbdown by Hollande can be avoided post-election if he wishes to avoid an economic calamity for France, despite all the talk about changing the fiscal pact. There will be a return to some kind of unsatisfactory equilibrium leading to a form of rapprochement between the newly governing left in France and Germany, the most likely form in the latter being a repeat of the grand coalition.

The concept of “safe” assets will find a timid expression in some form of investment spending in the peripherals accompanied by an institutional shake-up, the key element of which will be a reduction in the size of the Commission (which can be achieved under the existing treaties).

Meanwhile, the countries in trouble will have to grind their way through the necessary reforms.


Perhaps I could have been clearer above. The point about ‘safe’ assets is on of liability matching. A sov bond of a state expected to monetise some of its debts and have a weaker exchange rate to allow it to compete, having likely higher inflation, is a ‘safe’ asset to hold against liabilities in that currency.

In a currency union, that same sovereign bond is not a safe asset because the currency softness gets transposed into default risk pricing.


Meanwhile, the countries in trouble will have to grind their way through the necessary reforms.

Any thoughts on to what “the necessary reforms” of the financial sector might be?

It is just that to many of us hoi polloi it seems obvious that since the chief cause of the European component of the global financial crisis was the financial system that it would be the first part of the European arrangement that it was most necessary to reform. Yet it seems that any reform of the role, power or structure of the banks and wider financial sector seems to be “of the unrealistic proposals – politically speaking” variety.

How very odd.

The Fiscal Compact is a solution to the problems that the originators of our problems require. Nothing more, nothing less.

@ grumpy

Insofar as I understand the issue, I would agree. But my point of departure is that neither default nor exiting the euro are really viable propositions for any member country of the EA that wishes to retain some semblance of sovereignty.

Germany is not willing to move on the issue of eurobonds not so much because of the fear that other countries will not live up to their commitments but because of concern for the country’s own sovereign rating. No German government will move on the latter point.

The markets are uncertain as to how the tug-of-war between the opposing interests will play out and are pricing bonds accordingly against the background that you outline. Given that the Irish government itself, through various spokesmen, has at least been able to state clearly that the policy of continued borrowing from “official sources” can, by no stretch of the imagination, be described as austerity, this tug-of-war has still a long way to run in Ireland’s case.

The issues of bank resolution and eurobonds are, as Munchau has pointed out, two sides of the same coin. Neither will be resolved by a full frontal assault. Only a tangential approach can hope to succeed through some form of stimulus plan. Schroeder is very interesting on this topic, especially in relation to how it might be financed through some form of FTT, the one most likely to be acceptable being that already applied by the UK domestically. An added consideration is that the current multi-annual financial programme of the EU is coming to an end and can hardly continue on the present ramshackle basis.

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