Merkel’s D-bond deal wins fiscal pact vote

Posted on June 25, 2012

Angela Merkel, the German chancellor, spelt out once again on Monday her refusal to countenance mutualised debt for the eurozone, while giving way to pressure from her country’s 16 states to allow them to borrow money through joint “Deutschland bonds”.

The decision was reached on Sunday as part of a deal negotiated by Ms Merkel with the Länder prime ministers to persuade them to vote in favour of the eurozone fiscal compact enshrining budget discipline in national constitutions.

    It came as Wolfgang Schäuble, the finance minister, warned that big further steps to European integration, such as introducing eurozone bonds, would almost certainly require a national referendum – something that Germany has avoided since the 1930s.

    The total package agreed to ensure parliamentary passage for the eurozone fiscal pact, which requires a two-thirds majority and therefore opposition support, included measures to relieve the states and local authorities of up to €4bn in spending costs. Earlier Ms Merkel agreed on measures to boost growth and speed the introduction of a European financial transaction tax, to win the political support of the centre-left Social Democrats and Greens.

    An official explanation from the finance ministry on Monday night said the new bonds would be issued for the first time in 2013, adding that they amoun­ted to a form of “intelli­gent debt management”. The ministry insisted that the move did not amount to the mutualisation of the debts of Germany’s regions, an idea res­isted by Ms Merkel at European level. She repeated that such a move would be “economically wrong and counter­productive”.

    The finance ministry said that joint liability for debt was banned by the German constitution. In the case of the Deutschland bonds, the federal government and the 16 Länder would each be responsible for their share of borrowing.

    Previous German governments have resisted any such move, long sought by the Länder as a way of reducing their borrowing costs. The fact that Ms Merkel has given way was interpreted by some analysts as an indication of the circumstances in which she might be prepared to contemplate eurozone bonds.

    “This agreement in Germany … may also be somewhat suggestive of what may be necessary to have joint euro bonds,” currency analysts for Brown Brothers Harriman wrote. It might also “be a model for the Spanish government that is trying to impose fiscal discipline to its regional governments”, it added.

    But German analysts cautioned against reading too much into the concession. 

    “Some market commentators see it as a first step you would need to get to eurozone bonds,” said Thomas Kressin, senior vice-president of Pimco Europe.

    “While this is certainly true to some extent, I am not sure that this is the signal Germany wants to send. At this point of time, it is not even clear if these new Deutschland bonds will have a joint and several guarantee.”

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