The name’s EuroBond, a much likelier single currency saviour than SuperHerman

It was unlucky timing that the Franco-German axis chose to declare the Economic Government of the Euro-area on a day when it was confirmed that their combined economies are growing by less than 0.1%.

The Bundesboom appears to have turned into a worrying Bundespause. France has stopped growing. This is partly because if the knock on effects of the Japan tsunami, but also, worryingly it occurred before the recent euro financial crisis.

But there was no Big Bang from the unhappy couple atop Euromountain. This was no declaraion of statehood, instead it was the incremental evolution of institutions to support the faltering single currency. Three main new features:

1. A President of the Eurozone to enforce debt limits in Ireland Greece Italy etc… Step forward Herman Van Rompuy, the low profile president of the EU Council – one of, I think, 5 across EU institutions. A new breed of superhero to enforce fiscal discipline across a Continent. A cynic might they say that this euro crisis did not arise from a lack of Presidents. A lack of prescience perhaps?

2. Tax coordination – a common corporate tax rate for Germany and France – this could be a big move. The likes of Ireland will be looking on very nervously

3. France’s old hobby horse – the Tobin tax, a small tax on every financial transaction, has apparently been agreed on too, that’s a concession from Merkel. Could that work bilaterally? I doubt it. There might be interesting conversations with our Government.

So overall, an attempt to centralise decisionmaking over tax, spend and borrowing between France and Germany, as a prelude to doing it across Europe. Which leads me to the Eurobond, the much vaunted silver bullet awaited by many in the markets, the Italians, and are very own George Osborne.

The European press reported SarkoMerk as saying “Nein” to the eurobond. But my reading of it was more of a “pas maintenant” and even a “petit peut-etre”. Given that just a year ago Merkel was saying the Eurobond was illegal under the EU treaty, then they did, in my view, show a bit of leg on this issue today. Sarkozy used phrasing like ‘only at the end of a process of integration’ And Merkel acknowledged it as ‘a last resort’.

So lets just imagine that the Euro-area was not just a single currency zone, but an actual country, lets call it Euroland it has a population of 330 million, more than the US.

Have a look at its fiscal position: The annual deficit in Euroland is 4.4% as forecast by the IMF for this year. It could be better but its less than half that of the US (10.8%) and Japan (10.0%) and about half of the UK (8.6%). And the net Government debt in Euroland is projected at 60% of GDP by the end of 2011 (OECD). This is far less than the US (75%) and Japan (128%) and less than UK (62%). On every fiscal measure Euroland is in better fiscal nick than the other major economic blocks. It is the economic silver bullet.

But it would be a political earthquake. A centralisation of power like no other. Frau Merkel’s coalition partner the FDP are already making noises that they would pull the plug on her Government. Germany’s top tabloid is telling its readers to buy gold. The amount of power flowing to Berlin would court controversy in Lisbon, Athens and Dublin.

The question is whether that political rupture is preferable to a disorderly breakdown of the euro. And eurobonds lie at the heart of it. Even the idea that a eurobond is conceivable would probably calm these feral markets more than Super-Herman.