Take a peek at the debt-to-GDP ratios of various euro zone countries and you’ll notice a wide disparity. Greece’s debt is a whopping 144.9 percent of its economy. Italy’s is 118.4 percent. Seems unsustainable. But looking further down the list, a country like Finland’s debt sits at just 48.3 percent of GDP. In fact, if you look at the euro zone as a whole, the continent’s debt is a manageable 85 percent of GDP, less than that of the United States.
And now the eurobond idea has quasi-official backing, courtesy of a new report from the European Commission set to be released week. The commission is going to lay out several different ways of instituting a eurobond — some of which would require changes to the E.U. treaty, some of which wouldn’t. But there’s still a problem: the underlying political opposition to the idea wouldn’t go away.
After all, the idea still evokes plenty of outrage in countries like Germany and the Netherlands, which aren’t thrilled about bailing out their irresponsible neighbors to the south. A spokesman for German Chancellor Angela Merkel flatly rejected the eurobond idea on Monday, arguing that the euro zone countries in trouble should focus on internal reforms to placate the markets. “[The German government sees] a danger that such eurobonds could distract from ... laying bare the roots of the problems and ensuring that things improve,” the spokesman said.
And Germany isn’t necessarily the only obstacle here. Presumably the stable countries would demand tough budget rules on countries like Greece in exchange for the creation of a eurobond. How would those rules be enforced? And would Greece agree to such strict supervision? Recall the outrage in Ireland last week when it was revealed that the German Bundestag’s Finance Committee was examining the new Irish budget. Awhile back, Tyler Cowen offered a few other reasons to think that a eurobond wouldn’t be enough to stem the panic. See also Thomas Palley’s piece in the Financial Times from August.
Either way, any eurobond proposal would take awhile to get fully fleshed out — asking the 17 euro zone countries to agree on anything isn’t exactly a speedy process. And that still leaves the immediate crisis that’s roiling Europe. Spain’s borrowing costs are shooting up once again today, even after the newly elected Conservative prime minister, Mariano Rajoy, promised to implement bold new austerity measures. As Felix Salmon notes, markets don’t seem to agree with Europe’s “technocrats” that sharp budget cuts — and the accompanying hit to growth — can cure what ails Europe. Which means we’ve still got a crisis on our hands.