Eurobonds - next try

The European Commission looks determined to come up with a next attempt for a common Eurobond. It is still a long shot and will not alleviate the ECB any time soon, but it could play an important role on the road towards more integration.

Back again. According to media reports and leaked documents, the European Commission will present a so-called Green Paper on common Eurobonds on Wednesday. A Green Paper proposal will be followed by public consultations with relevant stakeholders and interested parties. This means, it is not a proposal that can be quickly adopted by Eurozone Member States.

Judging from the draft document, the European Commission has become more pragmatic and realistic, pointing to preconditions that have to be met before engaging in the now so-called Stability Bonds. According to the Commission, “additional safeguards to assure public finances would be warranted”. This could go beyond the recently adopted six-pack, with new rules on budgetary discipline and economic competitiveness.

The European Commission has come up with three proposals for a Stability Bond. Two options would carry “joint and several” guarantees, making Eurozone countries responsible for other countries’ debt. While option 1 foresees a full substitution of Stability Bond issuance for national issuance and would in fact deliver a fully-fledged single bond market (with the biggest moral hazard risk), option 2 only envisages a partial replacement of national bonds. The partial replacement in option 2 follows the well-known red-blue proposal, splitting the bond market into a Stability Bond market and a national bond market. A third option would be for the partial replacement of national government bonds with euro bonds carrying ”several” but not joint guarantees. In this approach, Stability Bonds would be underpinned by pro-rata guarantees of Eurozone countries and countries would retain liability for their respective share of Stability Bond issuances as well as for their national issuances. For all three options, no numerical ceilings have been proposed, yet.

Eurobond proposals have been presented more often over the last decade. Chances to actually get them have probably never been higher than currently. The biggest opponent of Eurobonds, Germany, is gradually changing its stance. In a reaction to yesterday’s reports, the German government did not come with its categorical rejection but with a milder “we will look into it”. In addition, the German council of economic advisers also endorsed a plan for a common Eurobond a couple of weeks ago. However, it was a Eurobond proposal for the “fiscally challenged” countries. In the German proposal, countries with government debt over 60% of GDP will be able to jointly finance the debt exceeding this level via a so-called European Redemption Fund. Joining the fund would require acceptance of certain automatic tax and spending restrictions and would require the country to put down 20% of its borrowing in gold or foreign exchange collateral.

The discussion has gained new momentum. Even if this time around chances for a successful Eurobond project are higher than with past attempts, it is still a long way to go and no quick fix for the current crisis. It is hard to see that the latest proposals can alleviate the ECB. Nevertheless, the latest Eurobond proposals have brought some new ideas as they clearly combine the lender of last resort function with anti-moral hazard measures. With such a construction, a common Eurobond could play an important and facilitating role on the way towards more political integration within the Eurozone.