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Angela Merkel is no bond girl

Eurobonds have been ruled out by the German chancellor, but for how long?

So, it’s no to eurobonds and yes to greater “economic government” for the eurozone, including a common corporate tax system in Germany and France. This was not the big-bang solution to the eurozone’s debt woes that investors were hoping Angela Merkel and Nicolas Sarkozy would provide.

Then again, the leaders of Germany and France appeared to take a step back from their fundamentalist position that eurobonds are light years away. Such commonly guaranteed bonds are now described as “a last resort”. That could be taken as a sign of greater pragmatism in Berlin and Paris.

The reality may be that Merkel, under intense scrutiny at home, is unable to offer warmer words for eurobonds, despite the urging of Italy, the UK and a large section of the financial community. She has to be seen to resist, otherwise German voters may rebel.

Put another way, the eurozone’s debt crisis would have to get worse before the button can be pressed. That’s a dangerous message to send because recent experience suggests markets will usually provide the necessary emergency to force politicians’ hands.

What’s more, investors now know growth in the eurozone has stalled; growth in Germany was just 0.1% in the last quarter and France was flat. This makes it even harder to believe that Spain and Italy will be able to reduce their debt burdens via exports to European neighbours; instead, the eurozone structural problems may become worse.

Sharing debts – in other words, eurobonds – are likely to force their way onto the agenda sooner or later.

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