The eurozone needs eurobonds
BNE calls on eurozone politicians to take steps towards creating a eurobond.
Two weeks ago, eurozone finance ministers announced what they hoped would be the solution to Europe’s sovereign debt crisis. They agreed to provide for a further €159 billion rescue deal for the Greek economy while also putting into place measures to avoid further contagion. The markets have given their verdict – this wasn’t enough.
With Spanish and Italian 10-year debt yields pushing a dangerous 7%, and markets in free-fall, the eurozone is back where it was two weeks ago with a newly emerging element of runaway global contagion. Phillip Souta, Director of BNE, said “Germany and other creditor eurozone members can break this vicious circle by agreeing to the joint and several guarantee of a eurobond.”
According to estimates by the German Institute for Economic Research (DIW), this would cost Germany about €15 billion more each year. Phillip Souta said, “This cost would be more than worth it to save the euro, the relatively low value of which has been one of the main reasons for Germany’s strong export-led growth over the last few years.” He went on to say that, “Such growth would not have been possible with the Deutschmark, which would have been worth much more, and choked off Germany’s export led recovery.”
Opponents of euro bonds argue that they would introduce an element of moral hazard, but euro bonds can be designed to mitigate those risks. One elegant proposal comes from Jacques Delpla of the Conseil d’Analyse Économique in Paris and Jakob von Weizsäcker, a fellow at Bruegel, a research organisation in Brussels, whereby eurobonds would only apply to the first 60% of a member’s debt, a “blue bond” with individual members being responsible for anything above it in a “red bond”.