George Soros has an opinion editorial in the Financial Times today endorsing the call for EU Bonds. Apart from the fact that he, more than anyone, should be aware of just how dramatically pressure in financial markets can lead to the break-up of a common monetary system, the article makes many valid points, including the following one, which I think is very much the heart of the matter:

Two thorny issues would need to be resolved – one is the allocation of the debt burden among member states and the other is the relative voting power of the different eurozone finance ministers. The existing precedents, namely the EU’s budget and the composition of the ECB, would be considered unfair and unacceptable by Germany. But many member states will balk at agreeing to a solution that changes the balance of power within the EU. Never­theless some concessions would have to be made to bring Germany on board. Usually it takes a crisis to bring about a compromise but the crisis is now brewing and the sooner it is resolved the better.

At the present time Soros is limiting himself to simply eurozone countries. I would go further, and bring all EU member states in on the act. The UK, Sweden and Denmark are in no position to quibble at this point, and in particular the UK, which may itself be in danger of receiving sovereign downgrades if it stands alone. So strike while the iron is hot, I say. There is nothing like a crisis to bring us all together (or send us all off spinning apart). The question of who will assume which parts of the debt is, as Soros says, a tricky one, but I would just reiterate the closing paragraphs of my post yesterday, since I think that if this is all well drafted, financial controls may well become much, much tougher, and not vice versa.

Given the difficult, and unforseen, pressure we are all up against, this [the initiation of excess deficit procedures] is, quite frankly ridiculous. Not that rising fiscal deficits, and rising debt to GDP ratios, are something we should be casual about, but I think what we need is a certain loosening of the rules in the short term, to be followed by a much stricter tightening as we move forward. And do you know the mechanism I would use to discipline the reluctant states when it comes to paying off the accounts run up during the emergency? Why yes, you’ve got it, the availability of those much-easier-to-finance EU backed bonds.

You see while the first argument in favour of EU bonds may be an entirely pragmatic one, namely that it doesn’t make sense for subsidiary components of EU Inc. to be paying more to borrow their money when the credit guarantee of the parent entity can get it for them far cheaper, the longer term argument in favour is that it may well enable the EU Commission to become something it has long dreamed of becoming – an internal credit rating agency for EU national debt. Basically in the mid term the EU bonds system can only work if it is backed by a very strong Lisbon type reform pact for those countries who apply to make use of the facility. This is what now needs to be worked on. And how do we know that that there won’t be yet another round of backsliding on all this? Well we don’t, this is the risk we just have to take, but sometimes you do need to simply cross your fingers and jump, since the burning building behind you looks none to attractive either, but what we do know is that since there will now be a mechanism whereby the bad behaviour of the few really can penalise the many financially, then there really will be some meaningful incentive to generate a pact, this time, that really has teeth to stop that penalisation taking place.