The Financial Times helps to resurrect an idea that CentreForum was cautiously plugging a year back. A common eurozone bond:
would provide more accessibility to the markets, help stabilise the continent’s economies and, most importantly, lower the cost of funding, which in turn would ease the burden on taxpayers.Such a bond would create the scope for much larger debt issues, attract more international investors and challenge US Treasuries as the most liquid bond instruments in the world. It could even help to advance the euro’s case as a reserve currency as opposed to the dollar, although this would be in the very long term.
John Springford wrote about it 9 months ago (pdf), suggesting it as a means of sharpening the fiscal incentives to remain on the straight and narrow. For ‘fiscal, straight and narrow, how not to’, google Greece. If more Eurozone countries were more disciplined in the GOOD times, then their ability to absorb shocks in the bad times would be enhanced, and the euro at less risk to disorderly outcomes.
The idea was that having access to centralised forms of borrowing – cheaper and more liquid as the quote above suggests – would be contingent on good fiscal behaviour. Hence an extra incentive towards that behaviour – without the sharp and politically impossible system of fines that the Stability and Growth Pact had required.
However, the problems were also clear, and our suggestions correspondingly modest. To engage in this when debt levels are rising precipitately would seem like a suggestion that Germany should just ride in and use its credit rating to help out the weak and profligate. Futhermore (see Samuel Brittan today) fiscal deteriorations are often externally driven and forcing countries to change their financing arrangements in response to, say, a collapse in global demand may be difficult during the actual circumstances.
What I could never get my head around was the degree of fiscal control that a new entity would need. If a new Eurozone Bond is to be a competitor with the US T-Bond, then surely it needs all of Europe’s credit standing behind it. In which case, if Country A borrows from it, the name on the bit of paper is not A, it is EUROPE. And in which case, how does EUROPE get the money back? Surely this involves a degree of central fiscal control of the EU over national fiscal powers – in which case, isn’t all the magic somehow within those arrangements?
Romano Prodi today writes of ‘a big step towards fiscal federalism in Europe‘ that “The only alternative to greater co-ordination of economic policies is dissolution of the euro”. To my ears he sounds rather keen on this:
the realisation that the Greek crisis presented an opportunity to take the inevitable steps towards economic governance that were not possible when the euro was created. This implies new institutions or bodies to monitor the budgets of member states, enforce fiscal discipline and impose punishments for repeat offenders of budget discipline rules.
A new eurozone bond sounds like a financial invention, but underneath it is a profound political shift, which I cannot see Germans swallowing. Not everyone in Europe would agree with Prodi that “the ship of the European Union is sailing in the right direction”. As Martin Wolf ceasely writes, a collapse in Eurozone Demand (which is now troubling markets across the world, including Asia) means inflating some economies while deflating others (as this letter reiterates). But so far we are only getting the deflationary bit – the Germans insisting everyone be Germanic.
If anyone gets the chance to read the analysis from Afme, and can answer any questions about it, I’d be in their debt. Pun intended.
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