AUGUST 26, 2011
Questions and Answers on the Eurobond - Full analysis
Eurobonds are essential to save the euro,
yet a flawed structure will produce adverse effects.
We must see what needs to be done, what to be avoided. |
In explaining the new order of things in the systemic crisis of the euro I concluded saying that a series of structural reforms in the architecture of the euro need to take place. Among them was/is the introduction of the eurobond.
The eurobond is quite a vague and broad concept since it has never taken material form before. It therefore creates a number of questions as to its form, the body ...view middle of the document...
Who should issue eurobonds and why?
4. How can that be achieved?
5. Does that breach Treaty provisions?
6. Will that affect the independence of the ECB?
7. Will that offer the incentive to states not to carry on with structural reforms?
8. Are there any alternatives within the current institutional framework and within the time limits that we have?
1. Why do we need eurobonds?
There are two reasons that make the introduction of the eurobond an imperative. The first is to put an end to the completely irrational practice that is currently taking place, of using taxpayer money to fund expensive bailouts to individual states. So far European policymakers have been pumping taxpayer money into the black holes of the system (insolvent states, quasi-bankrupt banking system), which understandably creates strong opposition from taxpayers across Europe. This opposition takes material form in the demands for collaterals for the second Greek bailout (which I now find out thathave been abandoned - for now...) and the increasing calls to exit the euro or to force the "fallen" countries to opt out or to dismantle the single currency altogether. The maladministration of taxpayer money is a very dangerous political practice that can undermine, not only the viability of the euro but most importantly the very idea of a common Europe. Thus is must be brought to an end before things get out of control.
The second reason that makes the eurobond ever more important, is that it will be a means of attracting the surpluses of Central Banks and other wealth funds outside of the Euro area and even the EU. For instance China is desperate to diversify its investments and wants to have a strong alternative to the dollar. A eurobond can therefore ease the pressure on European national budgets, by using money that comes from abroad. That way the highly toxic policies of the EFSF, whereby hardly-pressed governments are forced to participate in bailouts to nearly bankrupt countries, against the will of their taxpayers and against the viability of their economy and their public finances, will finally be abandoned (together with the overall revision of the approach to the crisis).
2. Do Eurobonds necessarily imply a mutualization of the debt?
It is true that a number of popular proposals suggest a mutualization of the system's debt, which they consider it to be a good thing (or at least not a bad thing). I personally disagree with this mode of thinking, as I believe that a mutualization of the system's debt, i.e. make every country liable for - and guarantor of - the debts of the other countries, will only succeed in bringing the dynamic of contagion to the power two. I see it as the same sort of failing policies carried out by the EFSF, which have utterly failed to contain the crisis and which allowed for contagion to the core. Doing the same sort of things and expecting different results is something that Albert Einstein would call...