LUXEMBOURG (MNI) – The current debate about issuing bonds backed by
Eurozone member states collectively masks the inability of the area to
implement needed reforms, European Central Bank Governing Council member
Yves Mersch said Friday.

The head of the Luxembourg Central Bank said while presenting his
bank’s latest bulletin that given the close relationship between
taxation and debt issuance, discussion of the so-called Eurobonds is
premature at the current phase of European integration.

Some aspects of relevant proposals could nonetheless be reflected
on, he said, though he implied in this connection that an expansion of
the existing European Financial Stability Facility (EFSF) might be more
appropriate.

Mersch decried “unhelpful” public comments as distracting markets
from the “enormous” reform efforts already undertaken in some EMU member
states.

The Securities Market Program (SMP) is ongoing, he said, even if
the ECB is well aware of associated risks.

Asked about the Eurobond proposal, which Luxembourg’s own
Jean-Claude Juncker has supported as head of the Eurogroup, Mersch
squarely rebuffed the idea as ahead of its time: “In this country we are
used to making one step after the other. It is not helpful if you take
the third step before the first.”

The debate about such debt issuance “is only hiding an incapacity
to make the necessary reforms,” he said. “I cannot exclude that some
element of the suggestions will be part of reflections,” he said. “But
we have already a EFSF and why not allow this existing fund to be
broadened in the scope”

Arguments against Eurobonds go beyond a technical nature to include
moral reasons, Mersch said. “If we do not do the necessary reforms to
increase potential growth we will burden the next generation,” he
said. “And I’m not convinced it would be responsible to shift an
excessive burden to the next generation.”

Moreover, the issuance of a collectively backed debt instrument
would by the nature of things need to go hand in hand with taxation,
currently the province of national governments, he observed.

“If you want to Europeanize debt, you have to Europeanize tax
collection,” he said. Thus, he reasoned, “I am not absolutely convinced
that [Eurobond creation] is the first step to take. It might ultimately
be the last step to take” on the path to genuine European integration.

For now, it might make more sense to “contribute to the confidence
in the market by strengthening the preventive side” of European fiscal
affairs, he said, calling specifically for more automatism in the
decision whether to launch excessive deficit procedures.

“It would be much more calming to the markets than to only talk
about debt and distribution of debt and redistribution,” he said.

Mersch said he was “still disturbed by the amount of uncertainty
that is created in the market by focusing on unhelpful comments and
proposals which prevent the markets from focusing [on developments] in
some countries where an enormous amount of reform has taken place.”

However, he added, “I am confident that with time the markets will
make an appropriate assessment” of EMU members’ reform progress. “It
would be helpful if” these countries’ efforts “would be complemented at
the European level.”

Turning to SMP, Mersch confirmed that the program will continue,
but he cautioned that “it is obvious that the monetary policy-makers
cannot be overburdened. In other words, we are also aware of the
heightened financial risks” as well as of “the heightened institutional
risk to the independence of the central bank.

The ECB, he noted, “cannot substitute for the lack of action in
other” areas. In particular, “we cannot blur the line between monetary
policy and fiscal policy.

Mersch confirmed that the Governing Council decided to extend
special liquidity measures most recently “by consensus.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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