On Eurobonds and Germany

According to "The Economist", Germany considers Eurobonds with horror, since they would be a big sacrifice for the creditworthy nations of the euro area. Stuart Holland turns down this argument. 

In regard to the issue of Eurobonds, The Economist” (August 20) wrote: “Until now the countries that call the shots in the euro area—those with strong public finances, notably Germany—have viewed Eurobonds with horror. They have two main objections. First, the pooling of public debt in the 17 member states would raise the interest rates paid by the most creditworthy while lowering them in countries with weaker fiscal positions... Second, Eurobonds would remove the pressure on improvident governments to put their public finances in order.”

On the other side, the paper mentioned the Bruegel Institute proposal, according to which each country could transfer to the European Debt Agency its debt until 60 per cent of GDP, while countries would retain national responsibility for debt above the 60% threshold. Concerning this proposal, The Economist argues that “Eurobonds would be a big sacrifice for the creditworthy nations of the euro area. The question for Germany in particular is whether this is a price worth paying to save the euro. The question for the other members of the monetary union is whether they can tolerate the much greater centralisation of fiscal policy that Germans would demand, as a bulwark against renewed budgetary indiscipline, in exchange for agreeing to Eurobonds.

Here Insight publishes a comment by Stuart Holland.

Roosevelt, Delors and Eurobonds     

In a report to Jacques Delors in 1993 I proposed the EU bonds which he then recommended in his White Paper Growth, Competitiveness, Employment. But unlike the Breugel Institute case (‘An unpalatable solution: Eurobonds could restore confidence, but at a cost’, The Economist, August 20) the bonds in the proposal to Delors did not need guarantees by member states, nor fiscal federalism, nor the debt buy-outs into which the European Financial Stability Facility and the ECB now are drifting. It drew on the Roosevelt New Deal which financed recovery through bonds without guarantees from member states of the American Union such as California or Delaware, or buying out their debt. Servicing the bonds would not need a US style fiscal policy but be funded by revenues from project finance as European Investment Bank bonds have been since 1958.

The case recognised that if nation states became regions in a single currency area they could not devalue to adjust trade imbalances. Bonds issued by a European Investment Fund would recycle surpluses to sustain cohesion and also enhance competitiveness by venture capital for small and medium firms. In 1994 France and Germany blocked the bonds and the European Investment Fund was reduced to guaranteeing rather than issuing equity, which was ineffective. Yet European bonds now could stabilise debt, fund recovery and finance a major EU venture capital fund.

If a Maastricht compliant share of national bonds of up to 60% of GDP were converted to Union bonds and held in a debit account which - unlike the Breugel proposal - was not traded these could not be destabilised by rating agencies.  Each member states would service its share of them without needng mutual guarantees. This could be matched by net issues of Eurobonds which would be traded but no more need the guarantees or fiscal transfers or debt buy-outs to which Angela Merkel is opposed than does the European Investment Bank which has issued its own bonds for fifty years without them and now is more than twice the size of the World Bank. 

EIB bond finance is not counted on national debt by any major Eurozone member state, nor by Ireland, Greece or Portugal. Similarly, Eurobonds need not count on national debt. They would attract surpluses from sovereign wealth funds and the central banks of the emerging economies which would be financial inflows to the EU rather than fiscal transfers between member states. They could be serviced by revenues from co-funding EIB investment projects in a European recovery programme. The EU therefore does not need to wait for fiscal federalism to issue its own bonds while, with them, governments could govern and avoid austerity rather than rating agencies rule.

(This comment was been sent  as a letter on August 23rd to The Economist, but not published.)

Stuart Holland

Formerly adviser on European affairs to Harold Wilson, Jacques Delors and Antonio Guterres. Currently Visiting Professor in the Faculty of Economics of the University of Coimbra. His new book "Europe in Question – and what to do about it" is published as an eBook by Spokesman Press and available on Amazon.