Let me take you “backstage” at FDL for a moment. After this post, Scarecrow and I had a discussion about the structure of eurobonds (I know, scintillating stuff). Scarecrow thought that sovereigns in the Eurozone could still float their own bonds, even if eurobonds were initiated, and take advantages of rates lower than on the collective security. This would mean that Germany could still finance their debt at a lower interest rate. They would still reject eurobonds because they would guarantee all Eurozone debt, and be on the hook from creditors for any sovereign default. But everything I read suggested that Eurobonds would supplant national sovereign bonds, and that Germany would object on the basis of having to pay higher interest rates.
The Guardian ran a primer on eurobonds over the weekend that appeared to agree with me, that Germany would pay more for its debts under a eurobond scheme, and peripheral countries would pay less. However, one reason for the confusion on this issue is that there actually is no set structure on the details of eurobonds.
About the only thing clear is that Germany and some other creditworthy northern countries oppose adopting such bonds anytime soon. Meanwhile, François Hollande, the new French president, seems keen on speeding things up — even if he has not quite articulated how his idea would work.
“You don’t know what François Hollande is talking about when he talks about euro bonds,” said Jacques Delpla, a member of the French Council of Economic Analysis, a panel that advises the government. “An open bar with German money for Greece and Spain? That doesn’t work.”
At their meeting in Brussels last week, European Union leaders agreed only that euro bonds deserved further study.
One of the ideas put forward here is that some debt would be put into the common pool, and some debt reserved for a sovereign’s own bond issue. So Germany would pay more for its debt on a percentage basis, but not completely. The idea would be to have “blue bonds” and “red bonds,” where countries get let into the eurobond (blue bond) system by lowering their debt level, but they still have to raise anything in excess with their own bonds (red bonds). Under this plan, Germany would lead the commission determining eligibility on access to eurobonds, giving them veto power. This idea mirrors a proposal that came out of Germany:
However, Merkel was forced by opposition MPs to examine a proposal from her own council of economic advisers that the eurozone 17 share the liabilities on debts over 60% of GDP using a so-called redemption fund. The fund, backed by euro member states’ gold reserves, would be worth €2.3tn and help governments scale back outstanding debt to below 60% of economic output. Rather than turn all national bonds into eurobonds over time, the redemption fund would be limited to 25 years and would be accompanied by a pledge by states to put debt limits in their constitutions and commit to economic reforms.
But nobody knows whether this would impact prior debt, essentially rolling it over into the new eurobond, or just for debt going forward. And nobody seems to know by what mechanism Eurozone countries would receive funds from the sale of those bonds. Also, would some entity, perhaps the European Central Bank, back the sale of the bonds? How would investors be ensured of payment? And what assurances on tax receipts or fiscal policies would this centralized authority demand of the countries participating in the eurobond? How tight would the fiscal integration have to get, and would that go both ways, not only on budget control but on fiscal transfers to the weaker countries?
There is absolutely no consensus on these issues, and the details matter. They would determine whether eurobonds made sense for the weaker countries or whether they just perpetuated the same system of a fiscal forced march to the sea.
On a related point, Brad Plumer has a story about how eurobonds alone cannot fix Europe, which is the kind of story I immediately click off in my browser. Of course no one thing will fix the kind of mess Europe has allowed themselves to fall into. That doesn’t invalidate the concept of eurobonds in any way. The details, however, might.