For all the headlines coming out of Brussels these past months, one could be forgiven for thinking that Brexit is the only issue at hand now. But one of the main reasons why the European Union wanted Brexit put away one way or another was to allow it to tackle the issue of debt — and specifically debt across the 19 EU nations that use the euro as their common currency.
For the 28 nations of the EU — the United Kingdom will remain so it seems until May 22, June 30 or October 31 — their entire debt amounts to 12.592 trillion euros (Dh52.30 trillion) at the end of the first quarter last year. Nineteen Eurozone nations had combined debts of 9.78 trillion euros then — up from 9.70 trillion euros the year before. In other words, for all the reforms and spending limits that the EU Commission had put in place, governments were still overspending and increasing their debt load.
Over that period, Belgium increased its debt-to-GDP ratio by 2.9 percentage points, Greece by 1.8, Italy by 1.6, Slovenia by 1.4 and the Czech Republic by 1.1 — while the largest decreases were recorded by Latvia, down 4.4 percentage points, Lithuania 3.5, Cyprus 2.8 and Sweden, down 2.6 percentage points.
Having policies in place at the commission level to deal with bad financial practices is one thing, picking a political fight is another. There have been many headlines over Rome’s budgetary habits and taking the government of Italy to task. Belgium? Perhaps that’s too close to home for the Eurocrats toiling away in Brussels.
But the debt is a pressing issue, which is why those Eurocrats are trying to convince Germany and other EU nations with solid finances and low-debt levels to embrace new bonds that would pool the IOU slips from all the 19 Eurozone nations into a single high-grade triple-A bond. And so far, the Germans aren’t buying into the idea of a pooled Eurozone sovereign bond.
As far as Berlin is concerned, their taxpayers could be on the hook for the damage done by Greeks and their 13 pensions in 12 months, Italians and their increased benefits for pensioners and the unemployed, or the Irish and their lax banking rules that turned the Celtic tiger into a cowering cat a decade ago.
The commission first floated the idea of a common bond a year ago. It flew like a lead balloon then with the Germans. And in an effort to give the notion of pooling debt and using the prudent nations’ standing as a means to boost poorer nations through a common investment vehicle, the European Central Bank has been tinkering with the details.
Tinker away all you like, say the Germans, it’s like wrapping stinking fish in a fine dress. Dress it up anyway you like, it’s still stinking fish.
It’s not the first time the idea of a common euro bond has been considered, and the idea was mooted a decade ago when the Eurozone was in the tightest and deepest grips of the global financial crisis. The European Central Bank had no powers to issue bonds, with each of the 17 nations then using the common currency pretty much left to their own devices to get themselves out — or deeper into — crisis.
Investment vehicle? It was a bit like trying to control a carriage and by 17 different horses, each pulling in their own direction. That particular euro trip had hugely damaging consequences for the likes of Greece, Italy, Portugal, Ireland and Spain. Increased debt levels that the commission is now trying to come to grips with, and coloured investors perspectives of both the individual nations’ creditworthiness, fiscal governance and banking competencies.
While the commission has introduced strict rules over budgeting, debt levels and fiscal measures, Europe’s banks have turned to the ECB as a provider of cheap credit to finance government bonds. That’s one reason why, for example, Italian banks are on the hook right now for roughly 20 per cent of Italy’s 2.36 trillion euros in debt.
Across the Eurozone, for every 1 euro held by banks in top tier assets, another 1.70 euro is held in sovereign debt in one form or another. That’s a ticking time bomb that the new commission will take in the summer must defuse one way or another, and the fuse to a crisis would be economic ripples caused by trade disputes with the US. Or by Brexit itself.
That Brexit issue is kicked down the road for now. But in Washington, President Donald Trump has threatened to impose almost 10 billion euros in tariffs on EU products over what he says are unfair subsidies to Airbus. Yes, the EU might respond with similar tariffs on Boeing — then would come a retaliatory strike on German cars at a time its economy is vulnerable.
It’s no wonder then the commission needs Berlin’s triple-A rating now. In six months’ time, it may simply be too late.
— Mick O’Reilly is the Gulf News Foreign Correspondent based in Europe