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Europe has been abuzz with lots of talk about a eurozone endgame, and the talk is promising. While EU leaders may not yet have reached an agreement on exactly what to do, all the signs point to a far more radical intervention than they previously planned on.Eurobonds are at the centre of these debates, both as a temporary solution and as a long-term solution to fixing Europe. And, particularly in the former incarnation, that makes a lot of sense.
The German Council of Economic Experts proposed a plan in early November that endorsed joint European bonds. Under the plan, countries would pool any debts exceeding 60% debt-to-GDP for eurozone countries into a temporary fund that would issue joint sovereign debt. Any country that contributed debt to this fund would be subject to automatic fiscal regulations, which would give central European executives the ability to intervene in national budgets, etc.
This plan accompanied three more options proposed in a study conducted by the European Commission, one of which looks like it could be quite similar to the one the German “wise men” proposed.
Akin to the European Financial Stability Facility, the virtue of the German plan is that it gets around a lot of the bureaucratic red tape because it’s technically temporary. The program would only exist for 20 years, avoiding the German Constitutional Court ruling that says EU leaders can’t permanently impose on the sovereignty of Germany without a popular referendum.
To date, it remains unclear just how much approval the plan would need from EU leaders, but since the fund seemingly won’t require EU countries to devote more money from their national banks, it neatly avoids a lot of the regulations put in place by parliaments that voted on the July plan to expand the EFSF.
Last but not least, the fiscal regulations imposed by participation in the pact would essentially be forced fiscal regulation for participating countries. True, countries would be loathe to lose fiscal sovereignty—even on a temporary basis—but most of the countries that would probably see the automatic regulations go into effect don’t have many choices at this point.
Germans will never go for plans to expand the role of the European Central Bank without significant treaty change, and that’s not the kind of thing that can be accomplished quickly. Eurobonds, on the other hand, have already been studied at length by a number of influential groups, and could be adopted far more quickly so long as they remain temporary. Further, they do not threaten the kind of hyperinflation that freaks out Germans—regardless of whether or not this fear is merited.
True, a temporary eurobonds plan would not completely fix the problems in the euro area, but it would signify a commitment that would drastically expand the time EU leaders have to make more substantial treaty change, not to mention going a long way towards fiscal integration. As we’ve said before, instead of kicking the can down the road, this option allows leaders to pick up the can and walking towards the recycling bin.
Germany, the Netherlands, and Finland may not like any eurobonds idea—and they will probably have to be pressured into accepting it—but at the end of the day, they’re far more likely to adopt a eurobonds plan than any action that would overhaul the ECB.