Why Angela Merkel needs to say yes to a eurobond

„I think the rest of the Eurozone has got the message. We have new governments committed to austerity and reform in Italy, Spain, Greece and Portugal. It is now time for Germany and Chancellor Merkel to step up to the plate and bring yields back down for all of the eurozone – not just Germany. With almost no growth in any of the southern european countries, they simply cannot afford to issue debt with near 7 per cent yields. To do so in the long run would bankrupt them for sure.

The eurobond idea is the most attractive to me because it only allows a cross euro guarantee for debts up to 60 per cent of GDP. Anything above that has to be issued without a guarantee. So for a country like Italy, where its debt to GDP ratio is 120 per cent, only half of the debt is covered. There is therefore still a strong incentive to bring debt down as non guaranteed Italian bonds would cost a lot more to issue.

If Germany agreed to this (perhaps in exchange for a strengthening of the stability pact) it would signal its commitment to the euro and almost certainly calm markets. The ECB might still have to stabilise markets in the short run but it would not have to print unlimited amounts of money, as the Germans currently fear. If Chancellor Merkel fails to meet the challenge then Germany potentially faces as much of economic disaster as the rest of the Eurozone. If she does not understand this then, like her southern European counterparts, she may end up being a victim of this crisis too. After all, the opposition SPD in Germany already supports the eurobond.”