Wednesday, August 24, 2011

Eurobonds: Wrong solution for legal, political, and economic reasons

by Daniel Gros

August 24, 2011

Eurobonds are being touted as the silver bullet to resolve the Eurozone crisis. This column argues that the Eurobonds proposal fails on legal, political, and economic grounds. It says that, whatever the variant, Eurobonds only make sense in a political union—and given the vast differences in national political systems and their quality of governance, any political union created on paper will not work in practice.

The term “Eurobond” is usually taken to mean a bond which has a “joint and several” guarantee by all member states of the Eurozone (see for instance Manasse 2010 and Suarez 2011). The “joint and several” guarantee implies that if the issuing country cannot service its “Eurobond” debt the creditors can demand payment from all other Eurozone countries. This would imply that in extremis the creditors could demand that Finland or Estonia pay up for the (Eurobond) debt run up by, say, Greece or Italy if the other large Eurozone members are either unwilling or unable to pay.

This contribution deals only with the idea that member states should be able to issue Eurobonds to finance their deficits and convert at least part of their outstanding debt. This is, of course, a totally different proposition from the idea that a common institution should be able to finance some task of common interest (see Gros and Micossi 2008).


No comments: