In a crisis that redefines every month or so what is possible and impossible in Europe, an idea that utopian Europhiles came up with only recently is already beginning to look like the only alternative to seeing the eurozone fall apart at the seams.
Eurobonds, i.e. European bonds to replace loans to countries like Spain that have become prohibitively expensive, might well be the only way to ward off the domino effect in the sovereign debt markets. That crippling effect has already hit Greece and Ireland and is now menacing Portugal after a series of alarming leaps in the risk premiums on its sovereign debt.
"Eurobonds are gaining more and more support in Portugal," observes José Reis of the University of Coimbra (in Portugal). "They would be a powerful signal that the will does exist to get a grip on the Union,” urges Paul de Grauwe from the University of Leuven (Belgium) in view of the “pervasive sense that the eurozone is going through an existential crisis".
Tabled before Christmas by Luxembourg’s prime minister Jean-Claude Juncker and Italian finance minister Giulio Tremonti, the idea of converting a large chunk of member countries’ debt into European debt is now endorsed by the Social Democratic Party (SPD) leadership in Germany, specifically ex-ministers Frank Walter Steinmeier and Pier Steinbrück. "The eurobond was still a heresy only a few months ago, now it can be said to be the official position of the German opposition,” notes Thomas Klau from the European Council on Foreign Relations (ECFR).
A European “New Deal”
Predictably enough, Angela Merkel has rejected the idea. According to most economists, the scheme would require German guarantees for the debt issues and would constitute a first step towards the sort of fiscal union that is viewed askance in Berlin and Frankfurt [German Bundesbank HQ]. But "as the crisis gets worse, there is growing opposition to Merkel in Germany and it is becoming increasingly clear that a choice will have to be made between fragmentation and greater integration via eurobonds”, argues Klau.
Various proposals have already been put forward. In an op-ed piece published in the Financial Times, Juncker and Tremonti advocate setting up a European Debt Agency (EDA) – a revamped version of the European Financial Stabilisation Fund (EFSF [set up in May 2010 with €440bn to help insolvent states refinance]). The agency would issue debt worth 40% of the GDP of each member state, which would be guaranteed by the sovereign states (and to a disproportionate degree, it should be added, by Germany). The crisis-ridden economies would change part of their debt into eurobonds, which would help to drastically slash their financing costs. Jean Pisani-Ferry’s Bruegel Institute has come up with a similar brainwave that would involve Europeanising 60% of sovereign debt.
Economists Stuart Holland (University of Coimbra) and Yanis Varoufakis(University of Athens) take it yet another step further, suggesting that the European Central Bank (ECB) issue European debt to the tune of 60% of GDP, as part of what they call a European “New Deal”, which would include restructuring part of the sovereign debt with debt relief for the banks.
"The Eurobond market would rival the US Treasury market (…) and send one of the strongest possible signals that eurozone countries are willing to bind their fates in the long term,” explains the European Council on Foreign Relations in its policy brief “Beyond Maastricht: A new deal for the Eurozone.”
Perhaps the only alternative to the collapse of the eurozone
It is important to distinguish between these proposals and the small-scale eurobond issue announced by the European Financial Stabilisation Fund (EFSF) to finance part of the Irish bailout. "The EFSF’s eurobonds compete with sovereign debt; we are proposing a substitute for sovereign debt," elucidates Varoufakis. As a matter of fact, the EFSF’s eurobond issue was accompanied by a steep increase in the risk premium on sovereign debt along the EU’s periphery, which caused no little concern to the governments there.
An intermediate step might be the creation of a sort of European bond to facilitate debt restructuring in countries like Greece and Ireland, suggests Barry Eichengreen from the University of California, Berkeley. To make it easier to exchange those countries’ debt for longer-term debt at lower interest costs, the EFSF could guarantee new bonds offered to the banks by an insolvent country like Ireland or Greece. Eichengreen believes this approach to eurobonds, as a “sweetener” to debt restructuring, would be more feasible than Europeanising sovereign debt, which is clearly not in the immediate offing.
The Juncker-Tremonti scheme does not address the immediate problem (Irish and Greek insolvency) and their proposals would take longer to implement, says Eichengreen. Still and all, in the present crisis even the least practical ideas today may turn out to be the only alternative to the collapse of the eurozone tomorrow.
Translated from the Spanish by Eric Rosencrantz