Euro bonds, Project bonds, electoral strategy

by Véronique Queffélec on mai 25, 2012


Question posée par des funds d’investissement:

Is Hollande going to give up on E bonds post parliamentary elections and stop putting pressure on Merkel in the public as he has been doing since the French election? Does he really think he can get E bonds by just pressuring her in the press and without giving anything in return short of handing over large portions of French sovereignty to the EU?

Notre réponse (our answer)
Nothing else but an electoral strategy

The relationship between François Hollande and Angela Merkel is biased by the electoral context. François Hollande wishes to defend strong positions as he wants to prove his leader qualities and not be « dominated » by the German political and economic influence.

In order to obtain the absolute majority at the parliamentary election in June, Hollande has to build a new image of the French-German alliance, different but as strong as the Sarkozy-Merkel one.

Each statement is part of an electoral strategy. Hollande has no interest in Greece exiting the Eurozone as France (3 major banks) would be the European country that suffers the most from it, hence actively supporting the eurobond initiative.
Concerning the project bonds, France is hoping to be one of the countries to benefit the most from this initiative to support its economic stimulus plan. It appears that France will not renegotiate the European Treaty but will rather ratify it in its present state. Germany supports France in ascribing the project bonds, making concessions for that matter.

E bonds:
Eurobond is a debt contract issued by the ECB to tackle the Eurozone sovereign debt crisis. Eurobonds refer to sovereign debts mutualization that is rejected by Germany as it will create inflation and insufficient compensations. The ECB will obviously have to act as guarantee.
A ECB/IMF couple is mentioned as the ECB cannot afford to back up the loans issued by bonds. It will therefore be the role of the IMF to do so.
The success of the Sarkozy/Merkel duo relied on austerity and the stability and growth pact, although Hollande wants to step aside from this for electoral reasons. But he will be recalled as France cannot afford to face Germany as it currently does : facing Germany means facing all the northern Europe countries.

Project bonds:
the European Commission launched a Project bonds Initiative. It has been approved by Germany. The aim is to stimulate economic growth by financing promising projects. It will be a community financing through market loans.
So as Europe, the European Community is not indebted, there will be a consensus on project bonds and the market will positively react as this initiative acts as a growth driver.
A European Commission report released in 2011 indicates that Europe needs €1500 billion to finance networks infrastructure (Galileo, roads, highways, electricity, rails, harbour facilities…). That is an interest Eurobonds will particularly serve.

The issue on project bonds will be solved after the French legislative elections. What will be the technical aspects are currently being discussed in Brussels.
Another issue stands on the geographic priorities to attribute these financings. The deal appears to be that France will not renegotiate the European Treaty but ratify it in its present state. Germany supports France in ascribing the project bonds, making concessions for that matter.

François Hollande wants to live up to the expectations of his electorate, showing strength and innovation and bending Merkel to his will.
This is nothing else but an electoral strategy as all his proposals are technically already in progress. All in all, there is nothing really new, but a lot of recycling.