Europe debt crisis forces officials to revisit creation of common eurobonds

Europe’s ongoing financial crisis is forcing officials to revisit an issue they brushed aside in the heady rush a decade ago to launch the euro as a common currency: how to yoke together their economies and issue common bonds to pay for roads, schools — and the deficits run by individual member countries.

Eurobonds were widely considered a crucial ingredient for any full-fledged monetary union in Europe. But these bonds, which would be backed by all the countries in the euro area, were too politically controversial at the time.

The idea has returned as an urgent issue of debate. Some European countries face soaring interest rates for their individual bonds, and the spiking cost of borrowing has raised concerns about whether these governments will be able to pay their bills. The result has been a series of government bailouts and a continental debt crisis that threatens to undermine the global economy.

The debate pits economically weaker countries in southern Europe, which could win easier access to borrowed money, against stronger ones in the north, which are concerned that they could be on the hook for their neighbors’ profligate ways. Imagine roommates who want to share a credit card but worry about the one who’s always splurging on designer clothes.

Amadeu Altafaj Tardio, a spokesman for the European Commission’s economic and monetary affairs committee, said the “construction” of the euro was left unfinished when it was introduced between 1999 and 2002.

Eurobonds “mean telling the people, the citizenry, that you are ready to share risks,” Tardio said. “That would be the strongest support for the euro area. It makes sense in the context of a monetary union. . . . Politically it does not seem feasible.”

But if Europe’s crisis has proved one thing, it’s that steps considered impossible at one point become urgently needed at another. In the past 18 months, leaders such as European Central Bank President Jean-Claude Trichet and German Chancellor Angela Merkel have crossed previously declared red lines to prevent countries from defaulting on their bond payments, which could touch off a market panic or even break up the currency zone.

The opposition to eurobonds is strong in Germany, the largest European economy and a make-or-break voice in many discussions.

German officials have said the idea may make sense in the long run — when all of the region’s economies share similar financial health and discipline. At that point, stronger countries such as Germany, the Netherlands and Finland would face less risk that their credit ratings would be lowered or their interest rates raised because of excessive borrowing by their neighbors.

But some economists, including influential voices in Germany, consider the introduction of a common bond almost inevitable. Eurobonds, they reason, would be the only way to escape a dynamic that is transferring financial risk from weaker nations to stronger ones, for example through the bailout loans provided by eurozone countries as a group to Greece, Ireland and Portugal.

Without the borrowing power that eurobonds provide, Europe might find it hard to grapple with the prospect of default by the larger economies of Italy and Spain, which have been struggling in recent weeks to convince investors that their bonds are creditworthy. There might not be enough money at hand to bail out either country.

“The German government would have no choice. . . . We don’t have a convincing answer,” said Peter Bofinger, a member of Germany’s advisory Council of Economic Experts. “The only way to do it is eurobonds. Then it does not matter, because there is no longer Italy or Spain to be attacked. You can only attack the euro area as a whole.”

Germany’s main opposition parties also support the concept.

Common borrowing and shared risk are second nature in the United States. Taxpayers across all 50 states are responsible for the federal government’s outstanding debt even though some states may send more money per capita to Washington than others do.

Although the amount of U.S. debt may be onerous, size can be an advantage. Economists who study bond markets refer to the “liquidity premium.” Investors treat U.S. bonds as an especially safe investment, confident that there will always be enough to pay them off when the time comes, because there’s so much money sloshing around in the United States. This “premium” is one reason U.S. borrowing rates have remained low.

Advocates of eurobonds want a similar benefit. Individually, the 17 nations that share the euro run the gamut, from the rock-solid Netherlands to weakened Spain and tottering Greece. Each issues its own bonds in its own name and pays a different interest rate. But pool the nations together and the liquidity premium might kick in. The eurozone would become a $13 trillion economy rivaling the United States in size and population and almost certainly would carry a AAA rating, allowing Greece and Italy’s needs to be financed as cheaply as Germany’s.

But lining European countries behind common borrowing could prove much more unwieldy than in the United States. To make it work, countries might have to agree on closer coordination to decide how much they spend each year. They might even have to surrender some power to a centralized finance ministry, akin to the U.S. Treasury Department.

There’s already plenty of thinking about how to tackle such issues. Former Italian prime minister Romano Prodi, for instance, recently suggested that euro nations should pool all their gold to back common borrowing. Bruegel, a European think tank, has suggested “blue bonds” that the euro area would issue as a whole and “red bonds” that countries would issue on their own, probably with higher interest rates.

A feasibility study by European Economic and Monetary Affairs Commissioner Olli Rehn is expected to map out the possibilities.

What happens next might depend on the course of the crisis.

“If Italy is at the brink . . . then I’m not sure it isn’t sellable,” said Zsolt Darvas, a researcher at the Bruegel think tank, and an advocate for the eurobond idea. “If this was addressed in 1999, we would not be in this crisis.”

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