Last week’s interview with Peter Spiegel of the Financial Times on the possibility of introducing some form of common Eurobond as a solution to the ongoing EU debt crisis has drawn several interesting reactions from readers. One came from prolific Greek Euroblogger Protesilaos, who argued that “Eurobonds” are not quite the same thing as “fiscal union”. Protesilaos argued that Eurobonds would, ultimately, need to be backed up with genuine fiscal union.
It seems to me that we all make mention of a “fiscal union” yet we are referring to something else… The discussion on the matter centers around fiscal discipline and mechanisms / ways of enforcing / achieving stricter fiscal rules. I am afraid to say that this is not a fiscal union, this is only a Stability and Growth Pact with an expanded scope of application.
A real fiscal union implies fiscal transfers, a surplus recycling mechanism, a unified banking sector, a treasury. Take the treasury as an example… how much should Spain contribute to it, how much Greece, France, Germany etc? This is not an easy thing to decide and by the time it is, the euro will belong to history. Similarly for all other issues relating to a fiscal union. The point is that it is not just about common fiscal rules – “discipline”. Of course we need common rules and of course we need a fiscal union in its proper sense, but this means that surplus countries will stop being as “surplus” as they are, for their surpluses will be transferred to deficit regions to achieve balanced growth and convergence.
We took this comment to Daniel Dăianu, former liberal Member of the European Parliament (2007-2009) and Finance Minister of Romania (1997-1998), for his reaction. As you can see below, he strongly agreed with Protesilaos.
Fundamentally, I’m in favour of issuing eurobonds. However, my reading of the crisis is that just imposing stronger fiscal rules and debt breaks is quite insufficient. And this is not related to the current state of the Single Currency, in my view; it’s rather about the whole construction of the Eurozone.
One has to think about the flaws of the Eurozone. And I’m referring to the lack of a common treasury. Not only world experience, but also theory indicates that an economic union cannot function properly unless a single currency is underpinned simultaneously by – not simply fiscal rules – but by fiscal integration. Fiscal integration is not equivilant to fiscal rules. An economic union needs mechanisms for dealing with asymmetric shocks. Dealing with asymmetric shocks boils down to what national governments can do. In an ideal world, with homogenous national economic spaces, with enormous real convergence, one could work with the assumption that there there is no need for an EU budget – that national governments can deal with asymmetric shocks. But this is not an ideal world. There is a need for a common treasury. I’m talking about the Eurozone here, but the Eurozone could shape the whole EU.
Is there any point in issuing Eurobonds, then? Would they help in the short-term?
Issuing Eurobonds, in my view, can deal with speculative attacks, but over the longer run it is not going to foster economic convergence. What we have experienced, even before the current crisis – is Mezzogiorno-fication in the Single Currency part of the EU. We’ve been witnessing the Mezzogiorno-fication of the southern fringe in terms of competitiveness, and that has beeen hidden by imports from Asia, cheap credit, etc. This structure cannot be dealt with by issuing Eurobonds. We can issue them (assuming Germany, the Netherlands, etc. allow it) but there are still gaps in terms of competitiveness and rigidity of labour markets – people do not move throughout the EU as they do in Canada or the US.
But you’re talking about instituting a transfer union that will transfer “surplus” from wealthy countries (i.e. Germany) to less wealthy countries (i.e. the so-called “Club Med” countries of Southern Europe). This sort of suggestion is deeply unpopular.
Yes, but I’m not just talking about transfers from the Netherlands, Germany, etc., to Greece, Portugal and Ireland. Because it may be that in the future, especially with ageing populations and the demographic changes that will occur, that the transfers go the other way. I’m talking about tools and mechanisms. There’s a hell of a difference between naming specific countries and creating tools and mechanisms.
So, you don’t believe that Eurobonds are the solution to the crisis? They’re just the beginning?
The Eurobond is not sufficient. The eurobond is just one step. A formative step. It can help the eurozone to combat speculitive attacks – and that’s key. But over the longer run, it cannot deal with the challenge of making the area functional.
What do YOU think? Are Eurobonds necessary? Are they just the beginning of the road to full fiscal union? Or is this just another excuse to infringe the sovereignty of EU member-states? Perhaps the solution is a looser, intergovernmental approach to co-operation and co-ordination? Or even the abolition of the Euro? Let us know in the form below, and we’ll take your comment to experts and policy-makers from across Europe for their reaction.
At last, with the crisis in Europe and the eurozone reaching a critical turning point, two of Europe’s leaders Mr. Sarkozy and Mrs. Merkel decided to do something about it. But why just the two of them took such important decisions? And some long delayed decisions too?
I do not understand any hesitance on the issue: we have a common market, a common currency, it is only natural that we need common financial policies to make the eurozone work. Even I can think of that. Until now, we had 17 members states using the euro, but 17 different economic policies, different economies and each country could borrow independently from the Markets. That led of course as we can see to a fine mess.
Now after so many talks, there have been calls to bring in the Eurobonds and bound all eurozone member states tighter.Still Germany is “kicking” and I do not understand their attitude. You see it is quite simple: you either go all the way with the project that you so much supported, or you keep having booms and busts of the “peripheral” economies and states and you will have to keep bailing them out.
They just want it all; their cake and eat it. They want the independence to manage their own affairs, they want the first say in the eurozone and other countries to follow their lead. It does not work like that in the hearts and minds of the voters though I am afraid. Since you have created the common currency and you insist on keeping it to the expense of the ordinary voters, then you need to cope on and do what must be done: bring in the eurobonds, proceed to a fully integrated European economy and yes take a cut in your AAA rating. The “peripheral” economies were reduced to junk status for the survival of the euro, it is the least you can do from your part.
And speaking about “peripheral” economies, doesn’t this sound a bit like those states and their citizens are just second class? In fact they are becoming more and more like the outer unimportant regions of a rich core of European countries. And they expect the EU to succeed and progress? Why do you want to keep bailing out Greece instead of allowing to prosper and progress and become as wealthy as Germany? Yes the rich nations will lose some of their wealth but the whole Continent will gain in stability.
The Europe I am dreaming of has equal opportunities for prosperity, stability, employment and progress from Iceland to Ukraine, Portugal to Cyprus and Norway to Malta. All states will be equal and will have opportunities to develop and exploit their natural resources for the betterment of their people first, but for the whole Continent in extend. Both eastern and western states, or southern and northern! We had enough divisions in Europe!
Mr Sarkozy and Mrs Merkel, by rejecting the Eurobonds and not taking this much needed step to solve once and for all the problems within the eurozone, they have just acted irresponsibly and prolonged the suffering of the ordinary people of Europe. Both from the troubled economies like Greece and Ireland, but of course their own as well. Because while the Greeks are suffering vicious austerity cuts for a loan that they should not have been forced to take in the first place, the Germans are also seeing their taxes being given away for the greed and incompetence of THEIR politicians.
Instead of investing in European countries, creating jobs and allowing those nations in need to become more industrialized like their richer counterparts, they think it is better to put them on social welfare….Literally! Because that is what they are doing. Greece and Ireland will be always receiving help from the richer states unless we create a stable and sustainable European economy. And where to begin with? The creation of the Eurobonds and perhaps even European rating agencies. It is time for us to take control of our economies and work together in solving the faults or just abandon the whole thing!
Yes to the euro, but only if our leaders commit fully to it and stop brushing the rubbish under the carpet! Allow a European economy to exist. We are half way there; what is the problem?
04/10/2011 Samuel Žbogar, Slovenian Minister of Foreign Affairs, has responded to this comment.
For the discussion of the eurobond to be put in its proper context we must first understand the very structure of the crisis, the problems that it brings with it and then think of the solutions to them and how will these function in order to produce the desired results and not cause more trouble. For that we need to clarify that the current crisis that is falsely labeled as a “debt crisis” is a systemic crisis and is deeply rooted in the structural flaws of the Euro architecture.
The crisis evolves in three separate realms which are interconnected. It is a triple crisis comprising a (a) debt crisis across the eurozone, (b) quasi-bankrupt banking sector crisis, (c) under-investment crisis, especially in the periphery but not only. If we fail to realize the above (something that our leaders do), we will massively fail to contain the crisis and prevent contagion to the core (which is what is currently taking place). Misreading the structure of the crisis means that we will continue the same failing policies that throw taxpayer money in the black holes of the system.
The eurobond, even if it is structured in a perfect way, will do nothing within its own capacity to stem the crisis since it will only address one aspect of the crisis. For instance it will do nothing to cleanse the European banking system from all its toxic waste (derivatives from the pre-2008 bubble and sovereign bonds from practically insolvent states). It will do nothing to recapitalize the private banks and restructure private debt together with public debt whenever necessary within the context of a system-wide strategy. It will do nothing for much-needed sustainable growth in the real economy (not another series of financial bubbles) and so on.
A eurobond that is not accompanied by a series of other measures that all together address all three dimensions of the crisis, will be nothing more than the same ill-advised, ad hoc half-measures that have so far only succeeded in making the crisis worse and in allowing it to contaminate even the healthier parts of the eurozone.
Feel free to visit my blog for more: http://protes-stavrou.blogspot.com/
20/10/2011 Peter Lilley, British Conservative MP, has responded to this comment.