As Euro Bond Wins Supporters, Details Remain Vague
To euro zone countries in need, euro bonds would be a noble expression of European solidarity and a crucial instrument for preserving the common currency.
To Germans and quite a few others, though, euro bonds would be a lot like co-signing a loan for a deadbeat brother-in-law.
Those caricatures have dominated a debate that has left Europeans deeply divided on a central question: Should euro zone countries create common bonds to reduce borrowing costs for members that cannot get affordable credit on their own?
But despite the intensity of the debate, even as political upheaval in Greece and bad bank loans in Spain mushroom into existential threats to the currency union, the euro bond remains only the vaguest of concepts.
About the only thing clear is that Germany and some other creditworthy northern countries oppose adopting such bonds anytime soon. Meanwhile, François Hollande, the new French president, seems keen on speeding things up — even if he has not quite articulated how his idea would work.
“You don’t know what François Hollande is talking about when he talks about euro bonds,” said Jacques Delpla, a member of the French Council of Economic Analysis, a panel that advises the government. “An open bar with German money for Greece and Spain? That doesn’t work.”
At their meeting in Brussels last week, European Union leaders agreed only that euro bonds deserved further study.
Mr. Delpla is the co-author, along with a German economist, Jakob von Weizsäcker, of one of the few detailed proposals so far. They outlined how euro bonds might be used to ease financial pressure on countries like Greece, Spain or Italy while addressing German concerns by encouraging more prudent government spending.
The basic idea of euro bonds does enjoy wide support among economists. Proponents also include Christine Lagarde, managing director of the International Monetary Fund . And last week the Organization for Economic Cooperation and Development in Paris called for some variation of euro bonds.
The various models share a basic idea: In addition to each country’s raising money by issuing its own bonds, as is now the practice, they would put at least some of the debt into a common pool. These pooled bonds would be issued by some kind of joint European debt agency, with all members assuming shared responsibility for repayment.
There is no agreement yet on whether that pool would be used to replace existing debt or to finance new borrowing. Nor is it clear how countries would have access to the money raised by the sale of the bonds.
Surprising as it may seem, the euro zone’s total government debt actually is lower as a proportion of annual gross domestic product — 87 percent — than that of the U.S. government, which is more than 100 percent of G.D.P.
A reason euro zone debt has reached crisis proportions is that a few countries in Southern Europe owe too much money and have lost the faith of investors.
The United States so far is able to stay a half-step ahead of its debt because it can keep selling Treasury bonds. Investors worldwide are so certain of being repaid that they accept interest rates of less than 1.75 percent for a 10-year Treasury bond.
Right now, though, the weakest euro zone members have no such credibility with creditors. So Spain must pay more than 6 percent on its 10-year bonds, while investors last week were demanding 5.6 percent for Italian bonds. And about the only ones willing to lend to Greece these days are Europe’s bailout institutions and a few roll-the-dice hedge funds.
But if euro zone countries threw their bonds into the same pot, the argument goes, they could create a debt market rivaling that for U.S. Treasury securities — and greatly improve the chances that Spain and Italy could continue to make interest payments and avoid default or a Greek-style debt overhaul.
That is why, as Greece edges toward an exit from the euro zone, and Spain wrestles with its expanding bank crisis, many analysts see euro bonds as unavoidable.
“If we don’t have common bonds very soon, in the next year or so, southern European countries will go bankrupt,” Mr. Delpla said.
The problem is that talk of euro bonds inevitably raises fundamental questions about the nature of the European Union. Such bonds would require European countries to watch one another’s spending much more closely, and each country would have to cede some control over its own budget.
For euro bonds to work the way U.S. Treasury securities do, investors would need assurances that they are backed by a central treasury, or at least an agency with direct access to tax revenue from each member state.
“This needs a very strong institutional setup,” said Guntram B. Wolff, deputy director at Bruegel, a research organization in Brussels. “If you are going to sell them to a Singaporean investor, the Singaporean investor needs to know who is going to pay that bond.”
Once European governments began financing one another on a large scale, they would certainly also want more say over one another’s budgets and big-ticket items like military spending or pension systems. For those who advocate a more powerful “United States of Europe,” these changes would be good. But they would represent a huge transformation of the decentralized Europe that exists today.
“Immediately behind the euro bond proposal lurks political union,” said Uri Dadush, a director at the International Economics Program at the Carnegie Endowment for International Peace in Washington.
“The moment you start saying, ‘Give me half your tax receipts,’ we are talking serious stuff,” Mr. Dadush said. “We are talking about giving up major sovereignty.”
The European Central Bank probably has the credibility to play the role of a euro bond debt-issuing agency. But the bank would almost certainly refuse to do so, seeing it as a threat to its political independence — and a violation of the prohibition on using the bank to finance governments.
But even if the E.C.B. did not issue the debt itself, euro bonds would need at least the central bank’s tacit support, Mr. Dadush said.
A big reason U.S. Treasury securities have retained credibility with investors, for example, is that despite official denials of complicity, there is an assumption that the Federal Reserve would not let the U.S. government go bankrupt. The E.C.B. would probably be much less likely to accede to such an implicit guarantee.
The German chancellor, Angela Merkel, made an argument similar to Mr. Dadush’s at last week’s meeting in Brussels, saying Europe must become more economically and politically integrated before it could issue common debt. But the federal Europe she seems to have in mind could take years to build, by which time the euro could lay in ruins.
Germany also fears that lower interest rates would simply reinforce irresponsible spending habits by countries like Italy. To German eyes, Italy, Greece and others did not take advantage of the low interest rates available in past years to make their economies function better.
In a short statement to the news media after the Brussels meeting, Ms. Merkel said “several participants noted that the common interest rates with the introduction of the euro really didn’t lead to improvements in the economic competitiveness of all the euro countries.”
Economists have proposed several ways around that problem. The model by Mr. Delpla and Mr. von Weizsäcker , for instance, would let countries put some of their debt — equal to no more than 60 percent of gross domestic product — into so-called blue bonds issued by all members. These would presumably carry a very low interest rate.
The rest — the red bonds — would remain the responsibility of individual countries and would probably carry much higher interest rates.
Countries would need approval from a central committee to issue blue bonds, and could do it only if they followed responsible economic and budgetary policies. Germany would effectively have veto power.
“If you behave well, you have access to blue debt,” Mr. Delpla said. “If you start to behave like Berlusconi, you will not have access to blue debt, and the price of red debt will go up.” He was referring to the former Italian prime minister, Silvio Berlusconi, whose policies were blamed for much of Italy’s current economic and debt woes.
Thus Spain and Italy would still feel acute pressure to improve the way their economies function and to get better control of public spending. One big advantage of the proposal, Mr. Delpla said, is that it could be put into action quickly without a major restructuring of the European Union.
European leaders are certainly aware of the blue bond/red bond proposal. Mario Monti, Italy’s current prime minister, is a former head of Bruegel, the research group that originally published it. But top European policy makers are still far away from approving any euro bond model.
Another of the most influential proposals actually came from the heartland of euro bond opposition. The German Council of Economic Experts, a group of independent economists who advise the government, late last year proposed pooling all of Europe’s debt overhang , defined as the amount above 60 percent of G.D.P.
Under this plan, countries would get rid of their excess debt — about €2.3 trillion worth, or $2.9 trillion — which would be paid off over 25 years. But after that, governments would have to keep debt below 60 percent of G.D.P. That is the limit they agreed to — but have not observed — when they formed the currency union.
So far, Ms. Merkel has expressed support only for so-called project bonds — joint debt used to finance roads or other infrastructure that might benefit all Europeans. Economists agree, however, that project bonds would not do much to stimulate growth across Europe, much less solve Spain’s banking crisis or reduce Italy’s borrowing costs.
Although leaders agreed in Brussels to study euro bonds more closely, the process is moving slowly. Herman Van Rompuy, president of the European Council, plans to come back to the leaders at the end of June with a first look at the “building blocks” for moving toward projects like euro bonds. He plans first to consult with the E.C.B., the European Commission and the president of the Eurogroup of euro zone finance ministers.
One European diplomat, speaking on condition of anonymity, said even a step toward euro bonds could reassure investors who have been watching Greece teeter and fear a bank run in Spain — and wondering what happens next. “The fundamental issue,” he said, “is who or what stands behind the euro.”
Paul Geitner reported from Brussels.