FRANKFURT, Germany — As a week of market
turmoil ended Friday, an increasing number of economists and policymakers were
calling for an unprecedented solution to combat Europe’s debt crisis: a new
joint bond backed by all countries using the euro.
Eurobonds would be a dramatic step toward
the economic integration of the European Union, and are billed by supporters as
an overnight solution to the crisis.
But the idea is being strongly resisted by
Germany, which as the most credit-worthy European country fears it would face
higher borrowing costs and more risks if it had to borrow jointly with
financially shaky nations.
This week’s stock market plunges and rising
fears about previously immune economies such as Italy and France created new
momentum behind the idea.
British Treasury chief George Osborne,
whose country is not in the eurozone but trades extensively with it, called
Thursday for serious consideration of eurobonds. Billionaire investor George
Soros joined the eurobonds chorus on Friday, saying that Germany and other
financially solid countries “must agree on a eurobond regime, however
defined. Otherwise the euro will collapse.”
Along with German objections, proposals for
eurobonds face economic and legal hurdles. Opponents say it would run afoul of
a caluse in the treaty governing the European Union that forbids it from
assuming responsibility for countries’ debts.
They charge that despite numerous proposed
safeguards such as strict debt limits or parliamentary scrutiny, eurobonds
could not prevent shaky countries from riding for free on the credit of solid
Eurobond supporters say those concerns are
outweighed by worries that a euro440 billion euro bailout fund — big enough to
rescue small countries such as Greece, Portugal and Ireland — would need more
money to save Italy or Spain. That could strain the finances of contributor
countries German and France.
Those supporters now include Belgian
Finance Minister Didier Reynders, German Social Democratic opposition leader
Sigmar Gabriel, Italian Finance Minister Guilio Tremonti, and Luxembourg Prime
Minister Jean-Claude Juncker, who heads the eurozone’s finance ministers’
The European Commission, the EU’s executive
body, is studying the feasibility of eurobonds at the request of the European
Parliament, although given opposition from Germany it is unlikely to be put
forward as a solution when German Chancellor Angela Merkel and French President
Nicolas Sarkozy meet in Paris over the crisis on Tuesday.
The basic principle behind eurobonds is
that European countries would guarantee each other’s debts, so that investors
would see the bonds as super-safe and loan at low interest rates. That would
prevent individual countries from being hit with market fears of default, and
then with the unaffordable interest rates that have driven Greece, Ireland, and
Portugal to seek bailouts from the eurozone countries and the International
Eurobonds would “solve the problems we
have right now overnight,” argues German economist Peter Bofinger, member
of an economic council that advises the German government.
“As soon as countries like Italy or
Greece and Portugal can issue eurobonds, they can always get the money they
need from the markets and they will get it at low rates,” said Bofinger.
“And so the risk that the country becomes insolvent and that German
taxpayers have to guarantee Italian or Irish bonds goes to zero.”
The key, even supporters say, is finding a
safeguard against one country getting in trouble and simply dumping its debts
on the others, or simply enjoying low interest rates at the group’s expense
while spending too much.
Economists Jakob von Weizsaecker and
Jacques Depla, writing for the Brussels-based Breugel think tank, propose
limiting the temptations to excessive borrowing by capping eurobond issuance at
60 percent of a country’s debt — the same limit imposed by the Maastricht
Treaty for countries joining the euro.
Those “blue bonds” would be
guaranteed, while countries could still issue “red bonds” that they
would be responsible for themselves. Since red bonds would carry higher risk
and higher interest, they would discourage excessive borrowing and help enforce
the euro’s rules against excessive debt.
The ultra-safe, abundantly available bonds
would be attractive as central bank reserves and bolster the euro’s role as an
international currency, the thinking goes.
Economist Bofinger said the crisis might
force the German government to change its mind. “The EFSF is also not
something that was envisaged by the treaty.”
“But in the crisis so far we have seen
that there are always things that the German government regarded as awful and
nevertheless they did it. It’s a story of refusal and then acceptance. Our
interest is in preventing the blowup of the eurozone.”