The German Chancellor Angela Merkel faced dire political warnings from her liberal Free Democrat coalition partners yesterday that a German pledge of support for eurobonds at today's euro crisis summit in Paris would risk bringing down her government.
The stark alternative was spelt out by the liberals as the German Chancellor simultaneously faced mounting global and European pressure to drop her country's opposition to eurobonds because they were considered the "only way out of" the euro crisis
Despite several reports to the contrary, Ms Merkel is still officially opposed to eurobonds. She has decided to make today's meeting with President Nicolas Sarkozy her first official duty since returning from holiday in Italy and has doggedly refused to comment on the issue.
But the Chancellor's Free Democrat coalition partners yesterday insisted eurobonds would be "fundamentally wrong" for Germany and warned his party would "have to ask whether the coalition still had a future" if the Chancellor signed up to the idea.
A German government spokesman attempted to play down the importance of today's summit and insisted there were " no indications" eurobonds would be discussed. "We don't think they are the right solution," the spokesman said.
Outside Germany government ministers and financial experts appeared to be queueing up to support the eurobond. The financier George Soros joined Italy's Finance Minister, Giuilo Tremonti, in giving his unequivocal backing to the idea. In an interview with Der Spiegel, Mr Soros said he was convinced that eurobonds were " the only way out" of the single currency's current crisis.
After weeks of euro-inspired turmoil, yesterday's markets opened calmly with modest gains across the Continent. At today's meeting Ms Merkel is expected to come under intense pressure from President Sarkozy to drop German opposition to the eurobond, not least because of France's own deepening financial predicament
Mr Sarkozy's stance is backed by Italy, Jean-Claude Juncker, the European finance minister group leader, and Olli Rehn, European commissioner for economic and monetary affairs.
The eurobond's supporters argue that pooling of nations' debts would enable financially stricken countries such as Greece to be bailed out under better conditions. However, Germany's Ifo economic research institute has calculated that eurobonds would increase German debt interest payments by 2.3 per cent – some €47bn (£41bn) annually.
This is why German public opinion and a growing chorus of politicians remain opposed to any strategy which smacks of throwing good money after bad. Ms Merkel's veteran finance minister, Wolfgang Schäuble, has argued that eurobonds would weaken fiscal disciple. "I rule out eurobonds for as long as member states conduct their own financial policies," he said in an interview.
His view was echoed by Klaus-Peter Flosbach, the Christian Democrat parliamentary finance spokesman: "We don't need eurobonds, we need solid budgets and these can only be achieved through saving," he insisted.
Q&A: eurobonds - Collective debt makes sense, but it will need compromises
It is impossible to buy eurobonds today. Instead bonds are issued, priced in euros, by individual eurozone governments. The largest single issuance is in Italian government bonds (a large economy with a large debt).
What's wrong with that?
For the first 10 years of the euro, the differences between interest rates on national bonds were small. That changed as debt levels exploded.
So how would they work?
As a pooled eurozone "national debt", guaranteed by all governments – the "all for one, one for all" principle.
What are the benefits?
Taken as a bloc, Europe's debt problems aren't that bad, as most of the basket cases are small. Overall, the eurozone's position is probably better than the UK, the US or Japan. Eurozone bonds would be a safer bet than many alternatives.
And the downside?
In the long term, the eurozone would need a single Treasury and "minister" for the so-called "fiscal union". All national budgets would have to be controlled centrally, which would compromise democratic accountability. The bonds also imply large north-south transfers. This is not widely resented in Britain – where we see the same from, say, London to south Wales – but feelings in Europe are more raw.
Who is in favour?
The Italians are the loudest proponents, but also Luxembourg, Spain, Ireland and others. George Osborne says it is inexorable logic.
Who is opposed?
Germany's government and its people are sceptical about sacrificing hard-won economic stability and sovereignty. But they are also committed to the euro: it is a difficult choice.
What's the alternative?
Endless bailouts and crises. As Germany assumes more and more of its fellow eurozone members, it is drifting into de facto eurobonds in any case, but with none of the potential advantages.
Germans. At the moment, the burden falls on German taxpayers. Under eurobonds the task would also fall to German borrowers – personal and business. Because the new eurobonds would be a hybrid of safe and unsafe debt they would have to pay higher interest to get investors to take on additional risks.
By Sean O'Grady