German Chancellor Angela Merkel may be adamantly opposed to it, but the idea of issuing bonds on behalf of the whole euro zone simply will not go away.
At a European Union summit dinner on Thursday, EU leaders debated ways of resolving the debt crisis that has haunted the 16-country euro area for most of the year.
Merkel said ahead of the meeting that euro bonds were not on the agenda and thought she had an agreement with Jean-Claude Juncker, the chairman of the Eurogroup of finance ministers and a major proponent of what are dubbed E-bonds, that they would not be mentioned.
It proved a vain hope.
"It was one of the first things that was brought up during the dinner and it kicked off quite a strong debate," said an EU diplomat with knowledge of the discussions.
Early in the meal, European Central Bank Governor Jean-Claude Trichet spoke up in favour of the idea, at which point Merkel displayed frustration and suggested that Trichet's communications skills were lacking, the diplomat said.
France, which has largely sided with Germany on how to tackle the crisis, tried to act as a bridge between camps, other diplomats said, while other leaders, including Italy's Silvio Berlusconi, expressed quick support for E-bonds.
"I think Merkel was somewhat surprised by the amount of support the idea was getting," another diplomat said.
Germany is strongly opposed because E-bonds would effectively mean all 16 euro zone countries — or 17 when Estonia joins the currency from Jan. 1, 2011 — financing a portion of their debt together and sharing a credit rating.
Berlin, which is the benchmark issuer of debt in the euro zone and enjoys the lowest borrowing costs thanks to its economic strength and reliability, would have to surrender some of its credit to riskier euro states such as Greece and Ireland.
If such bonds were ever to be issued — and it remains only a longer-term possibility, officials say — they would push Germany's costs up as the extra risk is priced in, while riskier countries would benefit from lower bond yields.
Some EU officials are even hinting that E-bonds are being priced into the market, although the proposal is only one of the factors that have been weighing on German Bunds over the past month.
DEBT MANAGEMENT
But Merkel's opposition is deep, and without Germany's support the proposal is very unlikely to gain momentum.
"With the so-called euro bonds, the weaknesses in Europe wouldn't be removed but instead spread upon everyone," Merkel said before the summit, arguing that joint bonds would remove any incentive for weaker economies to reform their finances.
After the summit, Merkel was again vocal in her opposition, saying there was little chance of E-bonds next year.
"In 2011 we should concentrate on things that have a real chance of being realised," she said on Friday.
Diplomats suggest there are some differences of opinion in Germany, with not all finance officials of the same mind as Merkel. The Frankfurt-based ECB is certainly more favourable.
But even from a practical point of view, it remains unlikely that E-bonds could become a reality any time soon.
If a portion of pan-euro zone debt were to be issued together — and Juncker and Italy's economy minister have suggested up to 40 percent of total debt eventually — it would require a single European debt management agency.
That would most likely be based on Germany's debt management office, which is vastly experienced, issues the most euro zone debt and is in charge of managing issuance for the EU's existing financial stability fund. Merkel may not approve.
Belgium's prime minister has said the idea of E-bonds "will not die", and the European Parliament is preparing a position on how the idea could be brought to fruition.
Italian Prime Minister Silvio Berlusconi said on Thursday that if there were E-bonds "I'd buy them right away instead of the bonds of a single country — It's Europe that's providing the guarantee."
That may be true, but when it comes to the European Union, almost nothing is guaranteed without German support.
