The Pros And Cons Of The Eurobond

The Pros And Cons Of The Eurobond
News
Like Us On Facebook
Like Us On Facebook

Eurobonds. German Chancellor Angela Merkel hates them. French President François Hollande loves them. And a growing chorus of EU officials think they’re the best bet for preserving the euro.

But are they, really?

The pro-eurobond case is simple enough: Instead of issuing their own sovereign debt, nations would issuebonds collectively and they’d share liability and debt service responsibility. Yields would no longer vary throughout the monetary union, theoretically smoothing one of the eurozone’s most glaring imbalances. Peripheral nations’ borrowing costs would likely fall, making it easier for them to borrow, service outstanding debt and stay solvent. So far, so good.

Easier borrowing also helps nations finance public infrastructure projects — the main reason Hollande, Italian Prime Minister Mario Monti and their Brussels cohorts are so enamored of them. They believe fiscal stimulus will best help peripheral Europe’s weaker nations start growing again, but financing these projects on a large scale is exceedingly difficult under the current system.

The European Commission typically pitches in, but nearly half of EU member states oppose increasing the Commission’s budget. To nations like the UK, which are trying to rein in debt, sending more money to Brussels doesn’t make sense. Eurobonds would theoretically provide a workaround to such political hang-ups.

To Merkel and her constituents, however, the advantages are overstated and the risks, particularly to Germany, glossed over. If Germany were forced to borrow through a collective scheme, where peripheral risks as well as German fiscal strength would determine yields, its borrowing costs would likely rise, and German taxpayers don’t want to pay for (in their eyes) the profligacy of others. (A phenomenon Ken Fisher wrote about here.)

And, as one German official told Reuters, pooling debt likely unleashes “unpleasant” political tensions over what is and isn’t appropriate fiscal policy — tensions that could dwarf today’s bailout politicking.

Other Quibbles

Merkel also quibbles with eurobonds’ larger purpose, infrastructure financing. Cross-border transport, water and communication projects can give economies a bit of a boost in the short term, but they don’t do much to rectify nations’ divergent competitiveness–the issue at the eurozone’s heart. As Ken Fisher also recently wrote, Europe’s share of the global economy has fallen since similar troubles hit the region 20 years ago — high unit labor costs, bloated public sectors and regulatory red tape have hampered productivity in some nations, making it difficult for them to compete within Europe and globally. Merkel has long championed free-market reforms to restore competitiveness will lay the best foundation for long-term growth, To her, eurobonds are a distraction and, at best, a Band-Aid.

Political debate aside, eurobonds are plagued with so many administrative hurdles, they may never see the light of day. Article 125 of the Lisbon Treaty – the infamous no-bailout clause — states the EU or any member state “shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any member state.” Eurobonds thus require a treaty amendment — a Herculean task, considering all 27 heads of state must sign off and all national parliaments need to ratify it. Negotiations on language all parties find acceptable, including potential opt-outs, could take years.

In Fisher Investments’ view, the deregulation, tax relief and labor market liberalization Merkel’s pushing likely provide the best long-term path for Europe. As ever, though, there’s likely no quick fix for the region.

Even if the union can pull off eurobonds in the far future, as a potential near-term fix for the eurozone they’re no more a silver bullet than any of the other grand plans touted in the past two-plus years. But the political will to preserve the euro remains steadfast, and officials likely continue their step-by-step approach to keeping the currency union intact.

The Street

Share Tweet
React
Like Us On Facebook
Like Us On Facebook

Preston Waters

Preston Waters is a thinker. He's not your traditional philosophical persona, however, as he leaves no topic untouched. Covering all the bases, from business to women, Preston Waters is the ultimate man's man for Gen-Y.

More In News

Politics Marco Cerino

The Solution To Peace In Israel May Be Getting Rid Of Hamas

Disclaimer: The views and opinions expressed in this article are those of the author and do not reflect the official position of Elite Daily Last week I wrote about the need for Islamic nations to join the peace process and bring a closure to the fighting. So far, no one seems interested in helping. Ceasefires […]

Also On Elite

Film

Gone But Not Forgotten: The 17 Fictional Deaths We Will Never Get Over

Disclaimer: Spoilers Galore. Death is f*cking bullsh*t. Sure, it gives life its value and meaning and everything, but screw that. Life is great and the reality that it has to end one day is total garbage. The saddest part of it all is that it’s final, eternal, forever. Once someone is gone, they ain’t coming […]

Women

The Real Deal: Why The New Batch Of Inspirational Models Is Here To Stay

In an obituary published almost a week ago, The Wall Street Journal celebrated the life of Ford Model Agency founder Eileen Ford, who passed away at the age of 92. Ford was credited not just for being a businesswoman so many years ago, when caring for a family was considered more important than helming a […]

Strategy

Why Every Yuppie Should Have A Side Hustle In Addition To A 9-To-5 Job

The idea of a side hustle is growing in popularity. It is estimated that 35 percent of Millennials in the United States are currently involved in a side business to earn a little extra money during their extra hours. However, many have not joined in on this trend due to a lack of confidence or fear of being seen as […]

Women

The 2 Week Timeline Of The Emotions Every Girl Feels When Starting A Diet

Dieting is not fun and definitely not an easy feat at first. The self-control you must exhibit is difficult for everyone and whoever claims otherwise has never eaten penne alla vodka or a grilled cheese sandwich while hungover. Sure people may claim they love being part of #FitFam or the whole clean-eating lifestyle, but the […]