A week on Eurobonds

When all you can quote from those who apparently warm up to the prospect of euro zone’s bonds is this…

“It’s imperfect and it would be difficult,” says Simon Tilford of the Centre for European Reform, a London think tank. “But it’s much less destructive, economically and politically,” than watching the euro collapse, he says.

Although, that wouldn’t be accurate. There is this letter from the co-director at Coimbra Centre for Innovative Management professor Stuart Holland, in which he is adamant the Eurobonds mean business.

“Giuliano Amato and Guy Verhofstadt argued that Union bonds or eurobonds could be introduced without debt buy-outs or member state guarantees or fiscal transfers. The precedent is the European Investment Bank, which has issued bonds for 50 years without them and has been so successful that it now is more than twice the size of the World Bank.”

The tone of the debate gets a tiny bit angrier up north, as Dutch prime minister Mark Rutte is not convinced, nor is German chancellor Angela Merkel or the European Central Bank’s chief economist Juergen Stark, either. Yet, even this description wouldn’t be strictly certain if we are to listen to Wim Boonstra from Rabobank’s economic research department, who believes the sole difficulty for Eurobonds to gain euro-wide acceptance could be that current grafts still need to fulfil these principles (here‘s the whole paper):

1) Fiscal discipline: eurobonds must contribute to strengthening the enforcement of budgetary rules, i.e. those from the Stability and Growth Pact.

2) Benefits for both strong and weak Member States: this is very important politically, as a eurobond proposal will only succeed if there is a broad political support.

3) Market stability: the market for eurobonds will be larger and more stable than national markets, sheltering individual countries from large swings in market sentiment. Markets should be able to correctly and gradually discipline governments for good and bad behaviour, instead of acting very erratically as described above. If this is not possible, failing market discipline should be replaced by a better internal disciplining mechanism.

4) Effective and self-financing resolution mechanism. Under the assumption that once in a while a country will run into financial problems, it should be possible to smoothly reschedule its debt (under strict conditionality) without bothering taxpayers in the other member states. Ideally, a eurobond system finances itself via an insurance mechanism.

5) In addition, it would be helpful if the issuance of eurobonds would contribute to the creation of a larger and deeper European public bond market and the strengthening of the euro’s position as a reserve currency.

Of course, this list can and shall be expanded:

“It’s a hypothesis piled on a hypothesis of course but we think it shows the two main things the eurozone is lacking. Those would be permanence, and the ability or will to make radical changes when a massively complex political structure already weighs things down”

It is clear, then, this is a conversation that will (hopefully) go on.