By John Geddie
LONDON (Reuters) – Emmanuel Macron’s victory in France’s presidential election is the biggest step yet in pursuit of pushing the idea of joint euro zone bonds past robust German opposition, the author of one of the first proposals for such a scheme told Reuters.
In a year when a populist upsurge in elections in the euro zone was to be its biggest test since the 2011/2012 debt crisis, Sunday’s clear win for the pro-European Macron over far-right nationalist Marine Le Pen has sowed expectations for greater financial and economic integration in the bloc.
This view is shared by Jacques Delpla, who told Reuters this impulse could revive a joint borrowing plan he helped devise in 2010 that aims to prevent debt crises in weak member states.
“When I first launched it I knew it was a long-term idea. After with (former French president Francois) Hollande and the likes they managed to freeze everything,” Delpla said.
“Now we have a combination of a liberal in France who is willing to push for such an agenda and then growth, which will help a lot.”
While Macron’s position on euro bonds is not clear-cut, a source close to the president-elect told Reuters he favored the creation of a bloc-wide euro zone budget, which would provide for joint borrowing. Macron outlined this position in June 2015 with Sigmar Gabriel, now Germany’s foreign minister, in a joint column for Britain’s The Guardian newspaper.
Delpla’s concept for these “euro bonds” is one of many.
EU institutions are examining another, which envisages a trans-national synthetic “safe” bond backed by debt from euro zone states.
Macron’s victory was applauded in Germany and some believe he may be able to soften German opposition to euro bonds, which could anyway be about to change.
Martin Schulz – the Social Democrat contender in Germany’s Federal elections in September – repeatedly advocated euro bonds during the debt crisis but recently backed off the plan, which does not play well with frugal German voters.
Schulz has lost two regional elections to Chancellor Angela Merkel’s conservatives this year, and faces another test in populous North-Rhine-Westphalia on Sunday.
But even in defeat, Schulz’s socialists could barter for control of the finance ministry in coalition talks. A euro zone official told Reuters that in this case, German opposition to euro bonds may become less categorical, or there could be highly conditional support.
Germans, who have paid the lion’s share of bailouts to Greece, Portugal and Ireland, have long opposed joint borrowing as they fear it would cost them more and remove the incentive for struggling states to reform their economies.
But Berlin does want to tackle the problem of regional banks holding too much of their own government’s debt, the so-called “doom loop” which can threaten both in a crisis.
This has brought to the fore the idea of a “safe” bond, which does not require joint guarantees like Delpla’s euro bond but creates a proxy euro wide synthetic asset that could diversify bank holdings of sovereign debt.
Frederik Ducrozet, a senior economist at Pictet, said greater trust between France and Germany could be more important than details of the bonds.
“There is a window of opportunity after the German election, especially with Macron as the next French president,” he said.
“It would be perhaps negotiating tactics that you discuss all options including euro bonds with the idea that you can get a deal in between… perhaps something like safe bonds.”
In some senses euro-wide bonds already exist.
An emergency bailout vehicle was set up in 2010 to raise funding for countries in distress on the back of a guarantee from each euro zone member. A permanent bailout fund followed in 2012 into which each member paid in start-up capital.
Kalin Anev Janse, the Secretary General of these bailout facilities, said there were wide differences of opinion on what constitutes a euro bond and more discussions on the subject might follow later this year.
“A good time for Europe to look at issues regarding the future of the euro area will be in the autumn, at the end of the year, once the French and German elections are completed. Then we would need to sit down together and see where we want to take Europe over the next 5-10 years,” said Janse.
Even if France and Germany reach agreement though, euro bonds would still likely need approval from the other 17 euro zone states. That could still prove difficult.
“Countries in very different situations should focus more economic policies to lift growth and less on financial engineering,” Lithuania’s Finance Minister Vilius Sapoka told Reuters, adding the time was not yet right for jointly-underwritten bonds.
(Additional reporting by Marc Jones and Dhara Ranasinghe in LONDON, Jamie McGeever in LUXEMBOURG, Jan Strupczewski in BRUSSELS, Michel Rose in PARIS and Paul Carrel in BERLIN; Editing by John Stonestreet)