Margareta Pagano: Eurobond or no? The Iron Lady is not for turning
The bloc's big noises are trying to persuade German Chancellor Angela Merkel to support the latest patch-up measure. But she is determined to resist
Margareta Pagano is a former business editor of the Independent on Sunday who now writes columns and business interviews for a range of publications, including the Independent, Independent on Sunday and London Evening Standard.
Sunday 27 May 2012
So who's going to win the latest skirmish over a new euroland eurobond? Will it be Mario Monti, Italy's unelected prime minister, who claims he can persuade Angela Merkel, Germany's elected Chancellor, to act for Europe's common good and support a new eurobond to save the eurozone? Or will it be Merkel, the lady with Europe's purse-strings, who is implacably opposed?
On the surface it looks as though the Monti gang is sizing up to be the more powerful bunch; he's got the backing of François Hollande, France's newly elected president, who is running his own hard populist campaign ahead of next month's general election, and whose showdown with Mrs Merkel over pooling sovereign debt is said to have forced other member states to come out in favour. Then there's the foxy Christine Lagarde, the head of the IMF; the OECD; Spain and Greece, and most bizarrely of all, David Cameron.
Still standing though, in splendid isolation, is Mrs Merkel who despite Mr Monti's claim on Friday that he can persuade her to come around, continues to pour cold water on the idea. It's not just the cost of eurobonds that worries her – Germany would have to pay an extra £40bn a year in servicing the debt on any new eurobonds – but the principle; it's against Germany's constitution.
But if you read only the Anglo-Saxon press, you could be forgiven for thinking it's only a matter of time before Mrs Merkel gives in to her silken neighbours in the south. Think again.
Listen to the speech she gave in Berlin on Thursday: "It makes no sense to paper over everything with eurobonds or other instruments that ostensibly show solidarity, only to find Europe in even more difficult straits than we are in today." The problem, she added, can't be solved with one big bang, only very hard work for Europe. They are not the words of a woman who's for turning.
The reasons why Mrs Merkel, and most Germans, are against are simple. Germany, a AAA rated country, can borrow for almost nothing – last Monday, it paid just 0.026 per cent for one-year bills, with 10-year bonds (German government bonds) yielding 1.47 per cent. Other AAA countries, such as the Netherlands, Finland and Luxembourg, pay similarly low levels. They oppose eurobonds too; and back Mrs Merkel in her fight.
By contrast, Spain is paying 6 per cent, Italy 4.6 per cent and France can raise money for slightly less at 2.45 per cent. These countries are having to pay these amounts to fund their debt to attract investors who will only buy the bonds at the higher rate to make the risk worthwhile. But the introduction of a new eurobond – which in effect would guarantee the debt of all the 17 eurozone countries and make them all liable– would increase borrowing costs for Germany while making it cheaper for its troubled neighbours. In effect, this means Germany, and its northern allies, would subsidise weaker southern members. There's still resistance within Germany to domestic transfers from such wealthier states as Bavaria to the less well off regions, so forget Athens. Using the same interest rate only works if there are fiscal transfers which is why Mrs Merkel is pushing for fiscal union as the final solution.
So, it's no surprise that Mrs Merkel is obstinate on eurobonds. She knows the cost to Germany would lead to higher inflation, she also fears that eurobonds would allow weaker countries to continue to spend more than they can afford and she wants behaviour to change. My money is on Mrs Merkel winning against the Monti-Hollande gang because she holds the trumps; only Germany can guarantee the mutualisation of debt.
But there's a much bigger battle for them all to face: Europe's banking system is effectively bust, bad debts need to be written-off and banks recapitalised. Compared with all that eurobonds are a sideshow.
Investment could help us lead the second agricultural revolution
Whisper it quietly because some of the old codgers in business and on the backbenches might collapse with shock but Britain now has an Industrial Policy.
Yes, I promise, the press release from the Department of Business, Innovation and Skills landed on my desk with the words: Industrial Policy for Science and Innovation in the heading.
It might not sound sexy but the announcement from David Willetts, the universities and science minister, and George Freeman, the Government's life science adviser, that £250m of grants are going into agri-business research is one of the best bits of news in months.
The money will go to half-a-dozen of the world-class agri-business research centres around the UK from Norwich to Liverpool.
It's an historic decision for two reasons. First, it's the most substantial investment into the sector for more than 30 years and will, hopefully, help these institutes expand on their already cutting-edge work on developing the new crop sciences.
Food production and food security are massive problems – as the Foresight Report recently warned the world will have to double its food production by 2050 but by using only half the land, water and energy it does at present. More importantly, it's not just the blue-sky research which is being backed with money but that government – through Defra – plans to work with farmers and agri-business.
Second, it marks a significant shift in the way the coalition is looking at business. For all the obvious reasons, industrial policy has been a dirty word for many Conservatives. But, at last, ministers have woken up to the view that there's a big difference between the state being a busy-body and an enabler – as the Automotive Council has proved.
With any luck, this investment will help us lead a green revolution in the bio-economy. We were home to the first agricultural revolution, perhaps we will lead the next.
Willetts and Freeman should be shouting from the treetops.
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