Cure or curse?

Calls for introducing eurobonds to help debt-ridden eurozone countries raise capital are growing louder by the day but also causing some friction.

On the one side are Portugal, Italy, Greece and Spain, the so-called PIGS countries that are pushing hard for eurobonds. On the other are Germany, Austria and Finland, which remain opposed to them. The two sides are still far from an agreement but that could change.

Eurobonds would be issued jointly by the 17 eurozone governments, at one common interest rate. Currently, each eurozone country pays different rates - with for instance Spain having to pay investors close to seven percent to hold its bonds, a rate considered unsustainable over time.

The eurozone's weaker economic members need help and believe jointly guaranteed bonds could restore confidence in sovereign borrowing. The idea of having their debt burden carried on stronger shoulders, they believe, would help lower interest rates. But that means that Germany, as the largest economy in the eurozone, might have to pay higher rates to borrow money.

Additional costs

Munich-based ifo-Institute estimates that eurobonds would create additional costs of between 33-47 billion euros yearly for Germany. That, claims Gustav Horn, director of the Macroeconomic Institute (IMK), is not true.

He expects interest rates for eurobonds to be slightly above German yields, pointing to the big push of investors into German government bonds. The country's finance minister, he argues, is benefitting enormously from the crisis by being able to "finance debt more cheaply than ever before."

Martin Schulz, floor leader of the Progressive Alliance of Socialists and Democrats in the European Parliament, also doesn't believe in the "horror numbers" that are circulating around euro-land. While admitting that the eurobonds will have their price, he said "they would be far less expensive than the continuous increases to the emergency umbrella or even a failure of the euro."

Pointing to the psychological effect of eurobonds, Schulz added: "The higher interest rates for PIGS countries are caused by markets showing little or no trust that these countries will ever be able to pay off their debts and that the wealthier countries will remain committed to the common currency." Eurobonds, he maintains, could serve as a symbol of unity among eurozone members in the future.

Peter Bofinger, a member of the German government's advisory council, also sees a stabilizing effect of eurobonds. The risk of individual eurozone states becoming bankrupt would disappear with eurobonds, he maintains.

Logical step

For Bert Rürup, who headed Germany's council of economic experts until 2009, common bonds in the eurozone are a logical step in the European integration process. Rürup argues that when the European Financial Stability Facility issues bonds as eurozone members agreed in July, then these bonds will be nothing more than "eurobonds light," he claims.

Ifo-Institute president Hans-Werner Sinn warns of eurobonds becoming a "sweet drug" because they could help countries in debt lose their appetite for saving. Why, he asks, should a country make a painful effort to save when they would pay the same interest rate as Germany?

Euro bond supporters point to an idea proposed by Brussels-based think tank Bruegel Institute. Eurozone countries, Bruegel suggests, should only be allowed to finance a part of their debt - namely 60 percent of their GDP - with so-called "blue bonds." This corresponds to the debt limit established in the Maastricht Treaty for eurozone members.

To finance debt above this level, members would need to issue "red bonds" and be liable for them. The scheme, supporters argue, would provide the necessary incentive for eurozone members to keep their debt under control.

Heribert Dieter from the German Institute for International and Security Affairs agrees that while countries would pay less interest on debt under 60 percent, they would pay "far more for everything over it." He views the eurobonds idea as a move to replace market discipline with a political mechanism.

Softening of the stability pact

It is an idea that Kai Carstensen, chief economist at the ifo-Institute, claims hasn't worked, pointing to the softening of the stability pact and the results of that move.

"Intentions were good back then, too," he said. "Everything worked well for several years. But when problems began to emerge, Germany and France were among the first to push for a more lax position."

Sad but true, if Estonia hadn't joined the eurozone earlier this year, Finland would be the only eurozone member today that has met and kept all the convergence criteria.

Author: Zhang Danhong / jrb
Editor: Andrea Rönsberg