Merkel Says Eurobonds “False, Counterproductive”

The German leader says Europe will not have a shared debt liability, “as long as I live.”

German chancellor Angela Merkel has dismissed as “false and counterproductive” proposals for closer European economic integration ahead of a European Council summit on Thursday that is set to discuss just such plans.

European Council president Herman Van Rompuy has drawn up proposals for a European banking union and the pooling of European sovereign debt in the form of eurobonds to combat the continent’s spiraling debt crisis.

Heavily indebted Southern European countries like Italy and Spain have praised Van Rompuy’s initiative but Austria, Finland, Germany and the Netherlands are skeptical. Chancellor Merkel and Dutch finance minister Jan Kees de Jager both voiced concern on Tuesday that a common deposit guarantee for banks in the eurozone and the creation of eurobonds would incur too much “liability” on the part of their countries.

At a meeting with representatives of her junior liberal coalition partners, Merkel even insisted that, “Europe would not have shared total debt liability as long as I live.” That leaves the door open to European governments underwriting each other’s debt in part though, even if the Germans see major problems with that as well.

The joint underwriting of debt up to a given percentage of gross domestic product, probably 60 percent, would be difficult to achieve on existing bonds and could drive borrowing costs on the debt that is nationally denominated up further. Investors would be even more hesitant to loan to troubled eurozone nations like Italy and Spain once they have “maxed out” the share of their debt that is underwritten by Germany and other strong European countries that are deemed creditworthy.

Dutch prime minister Mark Rutte is particularly worried that eurobonds would reduce the pressure to reform on the countries that have seen interest rates on their debt soar in recent months and years. Entitlement and labor market reforms, liberalizations and fiscal consolidation, considered part of the long-term solution to Southern Europe’s debt woes by the governments in the north, could be stalled if peripheral members are able to mend their deficits at the expense of the more competitive economies in the currency union.