Eurobonds a Non-Starter for Now
by Shane Fitzgerald
The establishment of a system of Eurobonds, whereby bonds are issued on behalf of the Eurozone as a whole, has been proposed by many commentators as a way of ending the European sovereign debt crisis. Political proponents include Jean Claude Juncker, Giulio Tremonti, Guy Verhofstadt and even George Osborne. Opponents include Otmar Issing, Jan Kees De Jager and, crucially, Angela Merkel.
The concept has also split opinion among economists and investors. Daniel Gros, Director of the Centre for European Policy Studies, argues in a paper for VoxEU that the proposal fails on legal, political, and economic grounds (see the references in this paper for some good links to relevant material). Billionaire investor and philanthropist George Soros thinks they are essential. Prominent US economist Tyler Cowen calls it a “non-starter which could not make it off the drawing board”. In an online debate on spiegel.de, Professor Henrik Enderlein says that correctly construed, they are the best instrument for preventing the collapse of the eurozone. His opponent, Hans Werner Sinn, counters that they would destroy the euro.
From reading all of these arguments, what is clear is that nobody really knows yet exactly how Eurobonds would work, how they would be funded, nor what they would cost. Not only does a huge amount of technical ground need to be covered before they could conceivably be implemented, but they are guaranteed also to be politically explosive. The Bundesbank’s latest report concludes by announcing that:
Unless and until a fundamental change of regime occurs involving an extensive surrender of national fiscal sovereignty, it is imperative that the no bail-out rule that is still enshrined in the treaties and the associated disciplining function of the capital markets be strengthened, and not fatally weakened. (emphasis added.)
That is not the kind of regime change that can be agreed to overnight. Eurobonds may yet form part of the deep and radical overhaul of the single currency area that is plainly necessary. But they hardly seem appropriate as an immediate response to an acute crisis. Any hasty move in this direction would be democratically unsound, and would arouse the mistrust of markets as much as citizens. Perhaps French President Nicolas Sarkozy put it best when he said that: “Eurobonds can be imagined one day, but at the end of the European integration process, not at the beginning.”
The European Commission is conducting a feasibility study. Meanwhile, it behoves European policymakers to concentrate on the crisis at hand.
This article was first published by the Institute of International and European Affairs. Access the original here.