A surprising amount of common ground was reached at last week’s informal meeting of European Union leaders—but there wasn’t agreement on joint issuance of Eurobonds.
The meeting was billed in the media as a showdown between Germany’s pro-austerity chancellor, Angela Merkel, and France’s new pro-growth president, François Hollande. As it turned out, there was a surprising amount of agreement, with Hollande even saying that a weaker currency was not the answer to the euro area’s problems. But there was less consensus on the controversial topic of jointly underwritten bond issuance.
It is clear that euro-area governments are finally realizing that institutional change is essential if the single currency is to survive. Attention is now switching to the formal EU summit scheduled for the end of June, and what it might deliver. We think some form of growth compact will be high on the agenda. In all likelihood, this will include more aggressive and efficient use of existing EU structural funds (i.e., regional development funds), new capital for the European Investment Bank and a pilot program for project bonds (loans for specific infrastructure projects backed by EU funds).
Unfortunately, these are unlikely to have a meaningful impact on the (gloomy) near-term outlook for euro-area output growth. A decision to give compliant countries more time to complete their fiscal adjustments would be far more effective, but there is no indication that this was even discussed last Wednesday.
The centerpiece of the June summit is likely to be the EU’s blueprint for enhanced economic and fiscal integration, which may include a reference to some form of Eurobond. Big differences of opinion persist on this subject, particularly with respect to timing. While France and others see Eurobonds as the next step in the integration process, Germany is more hesitant. It needs to be sure that the countries with which it shares borrowing powers do not abuse the lower borrowing costs that Eurobonds are likely to bring. Although Chancellor Merkel may be prepared to concede some ground in this area, it is virtually inconceivable that euro-area policymakers would agree on any form of joint bond issuance or debt mutualization at this point. But an indication that Eurobonds are likely to form part of the eventual solution to the sovereign-debt crisis might send an important signal to investors.
One thing that’s important to remember is that plans to reform the euro area’s institutional framework do not necessarily address the current phase of the crisis. The June summit will take place in the aftermath of a Greek election that is still too close to call. And if the result goes the “wrong” way, careful consideration of the right longer-term path will quickly give way to damage limitation.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.
Darren Williams is Senior European Economist at AllianceBernstein.