The Italian finance minister Giulio Tremonti, left, is reflected in a mirror as he discusses a point with labour minister Maurizio Sacconi. Mr Tremonti repeated his call for common European bonds, saying they would be the best solution for the euro-zone debt crisis. Tony Gentile / Reuters
The Italian finance minister Giulio Tremonti, left, is reflected in a mirror as he discusses a point with labour minister Maurizio Sacconi. Mr Tremonti repeated his call for common European bonds, sayShow more

Europe dragged into closer union



Europe's debt crisis is pushing the 17 nations that share the euro currency into a closer economic union.

The issuance of eurobonds - backed by all the euro governments - would mark a historic step towards integration and could also stop the contagion on European markets, say supporters of the idea.

But the plans for eurobonds face stiff opposition from Europe's economic heavyweight Germany.

Turmoil across global financial markets in recent days has given renewed impetus to the debate.

"What's happening does signal a need for change," said Brad Bourland, the chief economist of Jadwa Investment in Saudi Arabia. "Having a single currency but no euro-zone bond is a weakness."

Jointly issued bonds would effectively make individual governments' debts a common burden for all euro-zone members. The idea has won backing from Italy, Belgium, Luxembourg and several prominent economists, but is unlikely to find support from Germany and other richer members who have already contributed heavily to bailing out Greece, Ireland and Portugal.

Under a shared bond, creditworthy nations would be worried about facing higher borrowing costs and more risks if they borrowed jointly with less financially robust nations.

Support for the bonds has been gathering pace among policymakers in Italy and other debt-laden countries.

Giulio Tremonti, the Italian economy minister, said the plans were the "master solution" to the debt crisis.

"We would not have arrived where we are if we had had the eurobond," he said on Saturday.

Wolfgang Schaeuble, the German finance minister, said such bonds would undermine the foundations for the single currency by weakening fiscal discipline among member countries.

"I rule out eurobonds for as long as member states conduct their own financial policies, and we need differing interest rates so that there are possibilities of incentives and sanctions to force fiscal solidity," the minister was quoted as saying by the German newspaper Der Spiegel.

"Without that kind of solidity, there is no foundation for a joint currency," he said.

The conflicting opinions signal the depth of the division between members about how to resolve the debt crisis, which threatens to claim more victims.

Italy is the latest in the spotlight, with the country on Friday unveiling a €45.5 billion (Dh238.12bn) austerity package to help to ease market jitters.

Attention is now shifting to a meeting between Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, in Paris tomorrow.

George Osborne, the UK's finance minister, has also added his voice to the debate.

Asked if the only solution for the euro zone was some form of fiscal union, he told BBC radio: "The short answer is yes."

Since the single currency was launched in 1999, each member has kept responsibility for raising its own finances in capital markets. But the financial problems faced by Greece and other nations has highlighted weaknesses in such a policy.

But changing the framework to open the way for eurobonds may not be easy, say economists.

"It would be extremely difficult to accomplish as it goes beyond the Maastricht Treaty [of 1992] which the project was built upon," Mr Bourland said.