The way the Eurozone crisis has gone is that a peripheral country will announce a growing budget deficit and debt. The markets, concerned about the risk of default and the lack of economic growth given the foolish solution of austerity imposed on those countries, then gradually raise borrowing costs. This makes it impossible for those countries to afford to borrow, and they seek bailouts from their Eurozone partners.
If there were a way to smooth out these borrowing costs, it would remove the negative shocks to the system. One excellent suggestion is to pool the risk, to create a bond to pay off debt in the Eurozone guaranteed by all the member countries. This “Eurobond” would make it so Greece or Spain or Italy wasn’t fighting the bond markets all by themselves. It would allow those countries to benefit from Germany’s stronger economy and low borrowing costs, and reduce the spikes in weaker economies that have caused so much trouble. To analogize from our experience, it’s obviously cheaper for the federal government to borrow than it is for, say, Mississippi. It’s a question of leverage.
Perhaps because a big stimulus package isn’t in the offing, France’s new President Francois Hollande has honed in on Eurobonds as one of the key solutions to the crisis.
All options will be on the table when European leaders meet this week, including euro bonds, Mr. Moscovici said. “Each one has his own point of view, but at the same time, François Hollande has said that it is important to put everything on the table,” said Mr. Moscovici, referring to his boss, the newly inaugurated president of France [...]
But the German government is staunchly opposed to euro bonds until deeper integration and harmonization of budgetary and public spending policies have been achieved. Most Germans see euro bonds as another way for fellow European states to benefit from, and ultimately drag down, Germany’s unblemished credit rating.
Mr. Schäuble refused to address a direct question about his reaction to the discussion of pooling European debt. “We will take part in discussions about all constructive ideas to support sustainable growth,” Mr. Schäuble said. “It will all be discussed on Wednesday.” [...]
“The government has repeatedly made clear that collective state borrowing — that is, euro bonds — are no way to overcome the current crisis,” said Georg Streiter, a spokesman for Ms. Merkel on Monday. “It is still the case that the government rejects euro bonds.”
Germany wants all the benefits of the Eurozone without any of the downsides. They want a monetary policy that works for them – only them – and sets up their exports to the other countries in the Eurozone well, but they don’t want to share credit risk with the countries making them rich. They want the benefit of a currency union that allows for simple capital flows and trade but they don’t want to help out the weaker countries that risk taking down the entire euro project. They won’t alter their inflation projections at the central bank they nominally control, because the current ones work well for them. In these beliefs from Germany, you can see why the euro project is actually doomed.
Not only is France pushing for eurobonds, but so has the OECD:
The Organization for Economic Co-operation and Development has joined French and EU officials in calling for a move towards jointly-guaranteed euro bonds …
Speaking to the Financial Times, Pier Carlo Padoan, the OECD deputy secretary general and chief economist, said fiscal consolidation alone without other elements of a “growth compact” could ruin chances of a longer-term economic union.
“We need to get on the path towards the issuance of euro bonds sooner rather than later,” he said.
Christine Lagarde, the head of the IMF, echoed that call. That’s helpful to France’s cause, but if Germany remains resistant, there’s not much that can be done. Which means that the vicious circle the OECD described would continue.
“The risk is increasing of a vicious circle, involving high and rising sovereign indebtedness, weak banking systems, excessive fiscal consolidation and lower growth,” OECD Chief Economist Pier Carlo Padoan said in the report. Such a scenario “may materialize and spill over outside the euro area with very serious consequences for the global economy.”
Eurobonds is only part of the solution if the Euro union is to remain together, but it’s an important part.