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.”
Aug. 25 (Bloomberg) -- Piers Hillier, chief investment officer at Liverpool Victoria Asset Management, talks about the European bank selloff.
Aug. 25 (Bloomberg) -- Ajay Rajadhyaksha, head of U.S. fixed-income strategy at Barclays Capital, talks about U.S. exposure to European banks.
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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.”