Non-binding bonds

The media expect a drama and markets hope for a plan. Francois Hollande’s first European Union summit is unlikely to deliver either. It will not produce a miraculous solution to the euro crisis, or a blueprint for Greece to remain in the euro zone, and it won’t agree on a strategy for boosting growth in the region. But it also will not end in a showdown between Paris and Berlin on the question of euro bonds, which France favours and Germany opposes for the time being. The main reason is that it’s hard to agree or disagree without a common understanding of what the bonds should be.

Euro bonds are sometimes assumed to involve the general and unconditional pooling of debt within the monetary union. But French government officials have already made clear that’s not what they have in mind — without putting forward an alternative proposal. Meanwhile, the other participants in the debate all seem to have their own idea of what a euro bond should be.

In some sense, euro bonds already exist: debt issued by the European Financial Stability Facility (EFSF) — the euro zone’s bailout fund — could be described as such. The limited-purpose “project bonds” that the European Commission has proposed for financing infrastructure projects could equally fit the definition. The Commission has also suggested three different versions of what it calls “stability bonds”. Various think-tanks, and even Angela Merkel’s council of economic experts, have come up with further varieties.

Finally, there are the bonds that the EFSF or its successor, the European Stability Mechanism, would have to issue if they are permitted to inject capital directly into troubled euro zone banks — an idea that is currently being discussed. Though the suggestion has met with German opposition, other governments haven’t given up on the idea that Merkel could be ultimately convinced. After all, it wouldn’t require governments to pledge extra resources, and any support would remain conditional on countries maintaining strict financial discipline.

France and Germany may yet find themselves in a serious head-on clash over the question of euro bonds. But they are still far from that point. Before they can disagree, they first have to agree on what it is they’re arguing about.