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.