Euro bonds – the answer to the €-crisis?

The debt crisis is still spreading from one European country to another and the euro as a single currency is in danger. To ensure a brighter future and a survival of the euro zone the EU President proposed the issuance of common euro bonds causing a big debate among euro zone members.

The European economic crisis and the euro as a single currency has been a widely discussed issue in this blog. The post “It’s „Panic Time“ again: Investors re-start fearing EU Peripherals”, for example, outlined the bad economic conditions of the PIIGS, leading to a discussion whether Germany will abandon the euro in  “Will Germany kill the euro?” and to the proposal of splitting up the euro zone in “Why not making the Eurozone smaller?”.

An efficient solution to the economic problems is desperately needed. To keep the euro zone unified and support weaker members Juncker, Luxembourg’s Premier and EU President, and Italy’s Minister of Economy and Finance, called for the introduction of euro bonds, the German Tagesschau reports.

Euro bonds will be jointly issued by euro zone members and should take over up to 50% of financing of euro zone countries. Currently, all member states issue their own bonds and pay depending on their economic performance different interest rates, making it hard for weak countries to borrow money and strengthen their economy, the Tagesschau explains. Euro bonds, on the other hand, would have a common interest rate approximately around 4% which is above Netherland’s and Germany’s but below interest rates of countries, like Greece and Ireland, thus reducing the cost of capital for troubled members.

See the graphic for further information of how euro bonds would work.

But instead of fighting the crisis as a union, opinions are split. Especially Germany’s government has heavily opposed the idea, the New York Times states.

Reasons are easily understood. Common euro bonds would lower borrowing costs for countries in trouble, such as Portugal or Ireland, but, on the contrary, raise Germany’s cost of capital. In other words, costs would partially be passed on to strong economic countries that have no control over the fiscal behavior of their weaker members. Analysts in the Tagesschau claim this would cost the German government around €17 billion more each year. Do we as German tax payers want that?

Furthermore, the Tagesschau outlines, as interest rates of euro bonds are below those of weak European countries the pressure to improve the economic condition is reduced.

However, critics notably Luxembourg blame Germany is turning its back on Europe and is rather focusing on its national interests. They argue because Germany, as an export nation, benefits immensely from the low value of the euro and thus should agree to euro bonds. And even Germany’s opposition called on the government to support the idea, the New York Times reports.

According to the Financial Times, the first step towards a common euro zone bond has already taken place with last week’s issuance of a “multibillion-euro bond” to raise money for the Irish bailout.

Summing up, euro bonds might enhance borrowing opportunities of weaker euro zone members but they also involve many issues. I don’t think euro bonds are the right solution to Europe’s crisis. Having jointly issued euro bonds, debt of weaker European countries could even be more unattractive for investors causing no improvement to the situation. However, if the European Union forces an implementation of euro bonds, I think agreeing to the idea would be less expensive for Germany than going back to the D-Mark.

Yet, it is obvious that a change to the current debt crisis has to be done shortly to ensure stability and better economic conditions among euro zone countries.

This entry was posted in Financial crisis and various bubbles to be continued, Monetary Policy and tagged , , . Bookmark the permalink.

9 Responses to Euro bonds – the answer to the €-crisis?

  1. rudi2020 says:

    Blog searchon this topic reveals a common concern by stronger EU economies such as Germany and France. Disadvantages are understood thanks to Vivipre’s explanations. However, I am missing something. The whole EU-“idea”, one common boarder, common law etc, can be considered just as another common bond: marriage. In marriage you have ups and downs, hoping of course that ups prevail. Why marrying if thats not the idea. What we are experiencing with the Euro is the same. It is an aspect of the EU confederation. Bad times and weeker parts in the chain require the stronger ones to cut back and help out. Not complain, not quit (returning to the Mark is just a bad joke I suppose) but help. So everybody should be a less selfish, allow me: be more Christian? (I am not religious at all, but appreciate certain values.), and help out even more without complaining as long as the crisis takes. Tell me what you think.

  2. bravenewloock says:

    I am partially with you Rudi, but have a look at Joerg Bibow’s take of Germany’s complaining: Purely domestical rethorics aimed at potential voters, and historically wrong!

  3. stuerzele says:

    I agree with what you are saying rudi, but not every marriage makes it through the bad times… Now every country is trying to safe – excuse my language – their own ass. Sure, most of the EU countries are happy to be in this “marriage” as there is a big chance they wouldn’t have survived the crisis without it. Germany on the other hand might not have had as much trouble to go through it alone…

  4. As far as I am concerned, this is a highly sensitive issue.
    One should handle this topic with kid gloves because there are so many economies involved in this idea. That is why each side has its own – sometimes very stubborn – view of designing a “Eurobond”.
    And at the same time, this is the reason why I think the idea is theoretically useful, but practically not feasible at all.

    Reason: I perceive the highly-indebted states such as Spain or Portugal to become even more reckless with the way they handle their fiscal policy – because they can then rely on strong and stable economies such as Germany as their interest rate would always push down the refinancing-costs of these troublesome states.
    In the end, we would see states acting very reckless…a very known problem of “moral hazard“.

    I found this post very interesting: Fighting fire with fire
    I think its well written as it nicely compares this Eurobond policy with a historic event taken place in London…

  5. Pingback: Euro’s Reversal of Fortune & Outlook |

  6. Hi, Kizzel. I think the whole idea of issuing Eurobonds, apart from letting the weaker economies pay less interest on their debt, is actually discouraging “moral hazard.” How does this work? Well, the idea is to let governments in the Eurozone borrow only up to 40% of their GNP in Eurobonds; and if they need to borrow more, they have to issue internal government bonds, which will bear high interest (most likely even higher than what they face now in the market). Thus Greece, Ireland and the rest will have a significant incentive to limit borrowing in the limit permitted by Eurobonds.
    On the other issue. I think that 17 billion is a small price to pay for Germany to keep the rest of Europe happy, as the German economy benefits exponentially more than that from having the Euro as its currency as the Euro is much weaker than the Deutschmark would have been and hence Germany can export more. We should still acknowledge that German wages are kept artificially low, but that’s due more to the country’s mercantilist policies than to any actions of other European states.

    • Richard says:

      And a government couple simply hold a gun to the head of other Euro countries by defaulting on its Eurobonds instead of defaulting on its sovereign debt.

      If Eurobonds are such a great idea why doesn’t the public get together and start guaranteeing each others personal debt, Eurobonds for the public, everybody would benefit from lower interest rates on their borrowing, happy days!

  7. Pingback: Junker Proposes “Eurocredit” To Boost Consumer Consumption – Eurobonds For The Public «

  8. How long did it require u to post “Euro bonds – the answer to the €-crisis?
    | BraveNewFinance.”? It has plenty of beneficial information.
    Many thanks -Lyndon

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